Imports of Goods and Services
Imports of goods and services are affected by the same factors that affect theexports. While some factors have the same effect on imports as on exports, so of them have an exactly opposite effect.
Value of the Domestic Currency:
An appreciation of the domestic currency resultsin making imported goods and services cheaper in terms of domestic currency, henceincreasing their demand. The increased demand imports results in an increasedsupply of the domestic currency depreciation of the domestic currency have anopposite effect.
Level of Domestic Income
: An increase in the level of domestic income increasesthe demand for all goods and services, including imports and it results in an increasedsupply of the domestic currency.
The. International demand and supply positions deter theinternational price of a commodity. A higher international price would translate into ahigher domestic price. If the demand for imported goods is inelastic, this would resultin a higher domestic currency value of in increasing the supply of the domesticcurrency.In case of the demand elastic, the effect on the supply of the domestic currency woulddepend the effect on the domestic currency value of imports.
A domestic inflation rate that is higher than the inflation of othereconomies, would result in imported goods and services bee relatively cheaper thandomestically produced goods and services would increase the demand for the former,and hence, the supply domestic currency.
Trade barriers have the same effect on imports exports - higher thebarriers, lower the imports, and hence, lower the supply of the domestic currency.
Income on Investments
Both payments and receipts on account of interest, dividends, profits etc., depend onthe level of past investments and the current rates of return that can be earned in aneconomy. For payments, it is the level of past foreign investments and the currentdomestic rates of return; while for the receipts it is the past domestic investments inforeign economies and the current foreign rates of return, which are relevant.
Transfer payments are broadly affected by two factors. One is the number of migrantsto or from a country, who may receive money from or send money to relatives. Thesecond is the desire of a country to generate goodwill by granting aids to othercountries along with the economic capability to do so, or its need to take aids andgrants from other countries to tide over difficulties.