External demand

economic-dictionary

External demand is the quantity of goods and services that are produced in a country and that are demanded by residents abroad.

National producers sell, through exports, an important part of their production to agents residing abroad (individuals, companies, governments, etc.).

External demand can be a determining factor in the growth of an economy. For example, in the case of Chile, one of its main sources of income is copper exports. The demand for copper is mainly external, with countries such as China or the United States being one of the most important demanders. When this demand falls, the country's growth rate can be adversely affected.

Many countries offer subsidies or government aid to local producers so that they can sell their products abroad and attract greater demand.

When calculating the balance of goods and services of a country, the total external demand (exports) of a country is taken into account and imports are discounted, resulting in net exports or foreign demand, which can be negative if more goods are imported and services of those that are exported.

Determining factors

There are several factors that influence this demand. We describe some of them below.

  • The exchange rate or relative price of the currencies of the countries. The stronger the currency of foreign residents relative to the local one, the more interested they will be in buying local products.
  • The highest population or income growth of foreign countries. These factors increase the demand for local products. Thus, for example, when China or India show significant growth, the demand for raw materials such as copper, steel, oil, etc. increases significantly.
  • An interesting and varied offer of local products (for example typical products different from those seen in other countries or, on the contrary, innovative products) also tends to increase external demand.
  • Periods of global economic recession tend to reduce external demand.
  • Regulations, restrictions or limitations on trade imposed by a country tend to reduce external demand.

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