Determinants Imports and Exports

Convergent or divergent dynamics of imports and exports are the first causes of trade balance changes.

Everything that impact asymmetrically on imports and exports can impact the trade balance. In particular price and non-price competitiveness is relevant. If external pressure forces down the prices at which a country sells its exports, than a trade deficit is more likely ("terms of trade" effect). In other words, in a hierarchical world, trade balance can reflect political balance of power.

A faster GDP growth than trade partners' ones usually results in trade deficit, since imports are elastic to GDP (they rise more than proportionally).

Currency exchange rate can be very important - possibly due to a fixed exchange rate and a higher inflation rate than commercial partners, an overvaluation of the domestic currency can lead to deep trade deficits on most products and with most countries. A sharp devaluation can dramatically improve all these relationships.

If financial transaction are particularly intensive and autonomous, an inflow of FDI can lead to higher imports (of production inputs for the new foreign-owned plants), also because of revaluation of currency. Hopefully, this short-run effect will be balanced by more exports in the future. In this cases, trade balance is adjusting to financial movements.