From a business point of view, spending creates revenue, but production creates
ID: 1132481 • Letter: F
Question
From a business point of view, spending creates revenue, but production creates income. The difference between domestic production and domestic spending has three pieces: imports (included in spending, but not part of domestic production), exports (not included in spending, but part of domestic production), and the net change in business inventories (goods produced during a year but not sold during that year). Part of household spending is the purchase of imports, goods and services produced in other countries. Residents of other countries purchase our exports, products produced in this country and sold in other countries. Discuss how imports and exports affect U.S. income, production, and spending. Include your own personal examples.
Explanation / Answer
US is a net importer of goods meaning that the total dollar value of imports is greater than the total dollar value of the exports. The main items which it imports are crude oil, gold, chemicals, electronic parts, cattle etc. and the major items exported are machinery, cars, airplanes, food items including corn, beef, seafood and others. Some major trading partners include China, Canada, India, Mexico, Japan, Germany amongst others .
The country experiences a huge trade deficit because of the greater imports. This puts a downward pressure on the USD. The higher imports signify greater spending on the foreign goods by the conumser and firms. This increases the import bill for USA. The production for exports increases the income of the country which is used in expenditure thereby increasing demand for both domestic and foreign goods. For example at micro level because of higher production my company generates higher revenue and pays me a raise in my income. With this extra income I increase my expenditure on goods which can be both imported or domestically produced. This further increases the demand for goods and hence imports and production.
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