It is theoretically only natural to expect that export price of a commodity would be identical to its domestic price for the producing country. However, historically, there has been a great variance in these two prices. Export prices are dependent upon many factors that are far beyond the mechanism of production of goods. Let us analyze the forces that cause changes in the export prices of commodities.
Tariffs, by far are the single most important factor responsible for export prices of commodities. Different countries impose different tariffs for the same commodity ostensibly to protect the interests of its domestic producers of the same commodity. For example, if iron ore is found in abundance in India and a country imports iron ore from India, it has to impose tariffs on Indian ore to safeguard the interests of its domestic producers or else, cheaper Indian ore will cause a shutdown of iron ore producing factories in that country.
There are times when export prices of a certain commodity are deliberately kept even lower than its domestic prices and this is ostensibly done to keep competitors at bay in the international market. China is a prime example of the follower of this policy as it has been heavily subsidizing electronic goods produced there to let its exporters gain unfair advantage in international market so as to boost its exports.
If exporters find that due to tariffs imposed by importing countries, their goods become expensive than their domestic price, they tend to shift their products to domestic markets causing further lowering of prices of that commodity in domestic markets. If however, there is a shortfall of a certain commodity in the international market, its export prices are considerably higher than domestic prices and they fetch considerable profits to the producers.
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In brief: Export Price vs Domestic Price • Prudence suggests that export and domestic prices of a commodity should be identical or nearly equal. However, it has never really been so and export prices are always at a variance with domestic prices. • Export prices can be higher or lower than domestic prices depending upon various factors.
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