Foreign demand for domestic goods

Under Foreign demand for domestic goods means the resulting foreign demand for goods from the domestic market. In addition to the opposing offer, it represents an essential prerequisite for any trade in goods between open economies and leads to goods export from the domestic perspective and to goods imports from the foreign perspective. In the case of foreign demand, the demanders find the offer that suits their needs not on the market in their country, but on the market abroad. This demand relates to tradable goods e.g. B. machines, cars, PCs, but not apartments, land, etc.

Further definition

Foreign demand for domestic goods arises when open economies enter into trading relationships with one another and thus consumers and companies can be provided with both domestic and foreign goods. Domestic demand is therefore not congruent with domestic production. If there is both a domestic and a foreign offer, there is a choice on the side of the customer. If the choice is made for the foreign goods, foreign demand for domestic goods arises in the corresponding foreign country and leads to goods export there, at the same time to goods import at the place of demand. This in turn affects the trade balances (trade balance = goods exports - goods imports) of the respective countries. Possible causes that another economy may demand domestic goods are that these goods are not available, not sufficiently or not so cheaply in this economy.

classification

Foreign demand for domestic goods is part of the total demand for domestic goods, which also includes domestic demand for domestic goods. This relationship is shown in the IS function.

The IS function is as follows: ${\displaystyle Z=C+I+G+X-{\frac {IM}{\epsilon }}\!\,}$

applies here

• ${\displaystyle C+I+G={\text{inlaendische Nachfrage}}\!\,}$

• ${\displaystyle X-{\frac {IM}{\epsilon }}={\text{auslaendische Nachfrage}}\!\,}$

With

${\displaystyle Z}$	= Demand for domestic goods
${\displaystyle C}$	= Consumption
${\displaystyle I}$	= Investment
${\displaystyle G}$	= Government expenditure
${\displaystyle X}$	= Export
${\displaystyle IM}$	= Import
${\displaystyle \epsilon }$	= Price of domestic goods in units of foreign goods, real exchange rate

The choice between domestic and foreign goods

Choices

The openness of the goods markets means that the customer has 3 options:

• Save up
• Consumption of domestic goods
• Consumption of foreign goods

Demanders can be consumers, companies, domestic government and foreign demanders. The demand for foreign goods is closely related to relative price advantages and a comparative cost advantage in the corresponding foreign country.

Quantities influencing cross-border trade in goods

The trade in goods between countries is subject to certain restrictions. Depending on the country, the demand for foreign goods is disrupted by the state levying of customs duties, import taxes and quota restrictions on the amount of imported goods. Through certain agreements, treaties or associations of states between exporting and importing countries, foreign trade is to B. be made significantly easier and promoted by the lifting of tariffs. Important examples of this include a. the European Union and NAFTA. Exports are generally dependent on the level of production in the domestic economy and the relative price of foreign goods. The potential customer compares the price of domestic goods with the price of foreign goods. This is known as the real exchange rate. The following equation is used to formulate the dependence of export on production in the rest of the world Y *, as well as the real exchange rate ε.

${\displaystyle X=X(Y^{*},\epsilon )\!\,}$

Effects on the export when changing these sizes are shown as follows:

• Exports will increase as foreign demand for domestic goods increases. This is e.g. B. the case when the foreign production shows an increase.
• Exports will decline as foreign demand for domestic goods decreases. This is e.g. B. the case when the real exchange rate increases. Which means that domestic goods are becoming more expensive in relation to foreign goods.

Change in foreign demand for domestic goods

An increase in foreign demand leads to an increase in foreign production. Is this positively related to an increase in domestic production? Yes, because as foreign demand for domestic goods is also increasing, domestic production is inevitably stimulated. Domestic exports then increase. The increase in foreign production in turn increases the domestic demand for goods and production. This also increases imports. Ultimately, there is an improvement in the trade balance as imports increase, but relatively less than exports.

Example of foreign demand for German goods

Germany is a very export-strong country. Foreign demand is primarily for automobiles, electronic products and machines. In the automotive industry there are large corporations like Volkswagen and Daimler. Siemens is a leading company in the field of electronic products. In mechanical engineering, however, the sector is more dominated by smaller companies. The USA has the greatest foreign demand for automobiles with 16% of German automobile exports (as of 2002). Further examples of exports based on foreign demand:

• Office machines → Great Britain
• Cheese → Italy
• Glass → France
• Tea, beer → USA
• Milk, cement, bicycles → Netherlands
• Machinery, food → Russia

bibliography

• Blanchard, Olivier; Illing, Gerhard: Macroeconomics . Pearson Studies, Munich 2006, ISBN 978-3-8273-7209-3
• empirica Delasasse: Export Markets Germany - Profiles and statistics on the 50 most important buyer countries of German products , Fachverlag Deutscher Wirtschaftsdienst, Cologne 2002, ISBN 3-87156-387-0
• Farmer, Karl; Vlk, Thomas: Internationale Ökonomik - An introduction to the theory and empiricism of the world economy , LIT Verlag, Vienna 2005, ISBN 3-8258-8433-3
• Siebert, Horst: Außenwirtschaft , Lucius & Lucius Verlagsgesellschaft, Stuttgart 2000, ISBN 3-8252-8081-0

Individual evidence

1. ↑ Blanchard, Olivier; Illing, Gerhard “Macroeconomics”, Pearson Studium, 4th, updated and expanded edition, Munich 2006, p. 515 ff
2. ^ Farmer, Karl; Vlk, Thomas “International Economics - An Introduction to the Theory and Empirical World Economy”, LIT Verlag, 1st edition, Vienna 2005, p. 63
3. ↑ Blanchard, Olivier; Illing, Gerhard “Macroeconomics”, Pearson Studium, 4th, updated and expanded edition, Munich 2006, p. 540 ff
4. ↑ Blanchard, Olivier; Illing, Gerhard “Macroeconomics”, Pearson Studium, 4th, updated and expanded edition, Munich 2006, p. 516 ff
5. ^ Siebert, Horst "Außenwirtschaft", Lucius & Lucius Verlagsgesellschaft mbH, 7th, completely revised edition, Stuttgart 2000, p. 25 ff
6. ↑ Blanchard, Olivier; Illing, Gerhard “Macroeconomics”, Pearson Studium, 4th, updated and expanded edition, Munich 2006, p. 516 ff
7. ↑ Blanchard, Olivier; Illing, Gerhard “Macroeconomics”, Pearson Studium, 4th, updated and expanded edition, Munich 2006, p. 548 ff
8. ↑ empirica Delasasse “Export Markets Germany - Profiles and Statistics on the 50 Most Important Buyer Countries for German Products”, Fachverlag Deutscher Wirtschaftsdienst GmbH & Co. KG, 1st edition, Cologne 2002, p. 30 ff