My Economic Indicators – Part 4
Good evening Hivians!
I hope you enjoy the advent towards Christmas, I definitely do! Watching Christmas movies with my kids and eating A LOT of candy is as wonderful as it sounds! However, I am not here to talk about Rainbows and butterflies, I will be continuing my journey to learn/refresh my knowledge within the macro environment. I still find the macro economic topics an interesting topic- and it is a good way in being on top of the world. When determine when to invest these economic indicators would be a great supplement besides company analysis. The indicators will always be a good reminder that even though you think that you found a good stock and you can’t figure why it has not risen as much as you want, it is probably because you did not pay attention to the macro environment when investing in the first place. So, stay tuned, it is always good to know a little about the economic indicators out there.
Today we will deep dive into Export and Import, I will show you what these indicators do for a country and why they are important to pay attention to. And hey, if you have not already read my other parts/chapters you can find them here: Part 1, Part 2, and Part 3.
A tourist in Norway may well wonder what Norway’s source of income would be. They are in the housing market, engaged in culture, importing, and selling clothes and expensive wristwatches. But with the exception of Marius' sweater and Jarlsberg cheeses, few of the Norwegian products are known across the border. Most foods we sell are too expensive to appeal to foreigners; and we do not produce cars or mobile phones. However, if the same tourist does go to the coast of Norway, he will soon understand where we collect the BIG money; along the coast he will find fishing boats, oil rigs and large Norwegian-owned ships that transport goods all over the world's oceans.
Anyways, let us look at import and export and the trade balance. The term export is a set of goods and services that are traded between two or more countries. It plays a very important part in a land’s economy, together with import. By extending the definition of export, it can be said that it is any service or a product a country sends to a third party for use or purchase. It is also a public entity that is responsible for this procedure, such as customs, which deals with both exits and entrances to another goods area. Import could be said to be a set of goods and services that is acquired from another country for use in the national territory. Import, in the same way as exports plays an important role in the accounting of states. It is a commercial business that focuses on the purchase of items that are abroad and that are not available in their own territory due to their absence, or because it is too high prices compared to those found in other countries.
This brings me over to the trade balance which is the difference between the values of what we import and what we export - consequently you want this to be positive! An interesting topic about Norway is that crude oil and natural gas accounted for over 35 percent of Norway's total export revenues in 2016. Without these two raw materials the country would have had a significant negative trade balance in every single year since 1972. As we are fortunate to have access to these resources, we have almost always had a positive balance of trade. In the latest years it has not been that any good though, we had a decline of almost 40% in 2015 due to the oil crises and unbelievable 77% the subsequent year. If this persists Norway can actually find themselves in the same situation as USA, who must finance their trading profits by borrowing money- from or selling properties to the rest of the world.
Which then brings me in on the topic of trade balance and the exchange rates. Typically, it is argued that the relationship between the trade balance and the exchange rate in a free market adjusts itself over time: A very strong currency for a country means that the country produces goods that become more expensive for foreigners, which in turn leads to demand and export of these goods falls. The larger the share of a trailer's input costs that are paid and the larger the share that exports make up of the total turnover, the greater this problem becomes.
In the commodity market, however, each individual company is not able to differentiate itself from its competitors or set its own prices. The price level is determined by the total supply and demand, so here a higher exchange rate will simply lead to greater profitability. This is something you see in the Norwegian fish farming industry, where labor and capital expenses are served in Norwegian kroner, while most of the income is in euros, and competitors (for example England) operate with a different currency.
Small economies, such as the country I come from, Norway, are generally very dependent on imports- and exports of goods, and therefore on the trading partners' exchange rates in relation to the Norwegian krone. Export companies generally profit from a weaker exchange rate, as this makes their goods cheaper for foreign buyers - which in turn increases the demand and volumes that companies can sell for.
In any case, why do you need to pay attention to the trade balance in a country? (Export-import). As I wrote earlier a favorable trade balance means that exports are higher than imports, which results in a higher income level for a country. An unfavorable trade balance, on the other hand, implies a deficit situation in the relationship between exports and imports. In this case, the country spends more than it receives, which can lead to debt and deterioration of the quality of life of the inhabitants. The significance of the trade balance in the economy is that the calculation helps you to understand the economic potential of a country in relation to others, thus helps you to decide with which country it will be more convenient to start investing in. When I talk about investments, I talk about everything from companies to bonds, derivatives, and the like.
I will end here as the topic Export and Import is either a short overview or an incredible huge area of expertise as of my understanding lately. Please note that there are many more things to mention but it will go to far to talk about in this post. This was mainly a short overview of the indicators. I hope you got a bit wiser in terms of the economic indicators; Export and Import. Keep them in mind whenever you invest in a country, especially if you decide to invest abroad.
In the next round of my economic indicators, I will cover indexes like the PMI index, Baltic Dry-index and VIX index, stay tuned if you like to get a quick overview of the macroeconomic environment!
Cheers! -Olebulls
