Intro: When economists forecast economic growth they tend to put a lot of emphasis on external demand, but beyond the short term, its impact on growth is limited. it is important to keep in mind that even if a country witnesses an increase in demand from overseas the resources needed to raise output must come from somewhere, and in the absence of increased productivity, increases in exports would have to come at the expense of the production of goods for the domestic market.
When forecasting economic growth economists often put a lot of emphasis on ‘external demand’ which is to mean export shipments to overseas buyers. Similar to how ‘consumer demand’ is used in lieu of a truer understanding of the real economic drivers, external demand is often used as a means to shifts the focus away from the country at hand and towards the country’s largest export partner.
For example, economists often say that the outlook for the Chinese economy will depend on external demand, and given that the US is China’s largest export partner this means that the US economy will have a large impact. However, to then say that the outlook for the US economy is also dependent upon external demand from China makes the whole thing a circular reference.
A case can certainly be made in the short term that a rise in external demand from a large trading partner can lead to a boost in the economy. However, it is important to keep in mind that even if a country witnesses an increase in demand from overseas, it still has to produce these goods. If an economy is to raise production of goods for export, the resources must come from somewhere and in the absence of increased productivity, increases in exports would have to come at the expense of the production of goods for the domestic market.
Similarly, if a country experiences a decline in external demand, in the short term it may and indeed will likely suffer. However, over time land labour and capital will shift towards other areas of the economy meaning that it is domestic productivity that will ultimately determine the country’s growth rate, not how much another country demands of your produce.