What is the impact of interest rate on import and export of a country ?

Question

What is the impact of interest rate on import and export of a country ?

Answer 1

for example,

an increase in interest rate in country A

will reduce the consumer spending since consumption on consumer durables such as cars are interest rate sensitive.

will reduce investment since the cost of borrowing money has increase for investors and firms

will reduce consumer, investors and firms confidence

reduce aggregate demand, reduce national income, consumer will less likely to buy import products

however consequences of exports when there is an increase of interest rates is unknown since it is possible that firms will start to reduce its domestic supply and export more (exports will increase)

or it is possible that firms will downsize its production, hence reducing its production- including its exports (exports will decrease)

Answer 2

Recall the BOP accounting eqn.

NX=-GDCF+I=-FII+FDI.

now foreign investments r dependant on a variety of factors lik overhead capital, human capital, prospects of growth which r best correlated with I. BUT it's I(r); in fact beliefs rate of interest affects any portfolio investment and fdi behave just in same direction as I to int rete . so we can wite

NX=i(R)

where i  is a function mapping r to net capital inflows and domestic requireement of capital for investment.

this is it net xports r dependant on rate of interest but how do we xplain this phenomenon. well when interest rates r higher cost of production(I is negatively related to r, why) r higher ditto with supply cost of domestic product so foriegn products appear cheaper or products payable in foreign currency will b cheaper with domestic money , so IMPORT. again when int rates r lower Local producers get a boost these products r sold outside so NX is +ve. note since I depends -vely to r , foreign portfolio more promising so net investment abroad. thus is b'haviour of nx inverse to gdcf b'coz of interest rates......................................