Question

Why might imports and domestically produced goods be complements rather than substitutes? (Hint: Consider the business cycle!)

Answer 1

When countries begin expanding their business activities, it allows them to bring in goods and services from other countries which it may sell. Though this attracts taxes of various degrees, yet countries have found a way of expanding business post the 2000's and since then the world has seen enhanced multi fold growth over the years. Countries have over a period of time realized that imports are not substitutes but rather help in development of other products and services which otherwise would not have taken place.

When we import goods into our country, it helps businessmen by expanding into previously unknown areas thus, acting as a complimentary good to one another. When a country decides to import a certain product, already existing manufacturers face tougher competition and begin developing technology to overcome the problem. This also acts in favour of the importing country and goods which others produce become better in technology.

On the other hand, developing economies with the opening up of their country have imported numerous things one of which are computers. Countries such as India and China have imported computers into the country and have enabled their existing products to be much more sophisticated and this meant that the import led to development of local technologies and services which acted as a compliment.

The whole idea behind this is that some countries do not have similar products to act as a substitute. They have a different business cycle in which they are still at the expansion stage and their markets have not yet matured. Bringing in new products provides an opportunity to improve on existing products. Therefore, the imports in itself have nothing to compete with but rather lead to development of existing products which then act as compliments rather than substitutes.

Please feel free to ask your doubts in the comments section if any.