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Imports are an important indicator of an economy’s health. A high level of imports indicates robust domestic demand and a growing economy. If imports are mainly machinery and equipment, it means they’re being used to increase long-term productivity.

When net exports exceed imports, the nation has a trade surplus. It’s easy to see how a surplus contributes to economic growth. It means more output from factories, more people employed and an inflow of funds into the country.

In a healthy economy, exports and imports are both growing. If exports are growing but imports sharply decline, it may mean the rest of the world is in better shape than the domestic economy. The opposite scenario can mean the domestic economy is faring better. But a rising level of imports and a growing trade deficit – when imports exceed exports – can have a negative effect on the level of domestic currency versus foreign currencies.

In general, a weaker domestic currency stimulates exports and makes imports more expensive. A strong domestic currency hampers exports and makes imports cheaper.

Higher inflation usually comes with higher interest rates, but its impact on currency is mixed. Conventional wisdom says currency with a higher inflation rate will depreciate against a currency with lower inflation and lower interest rates. But the low interest rates that have prevailed around the world since the 2008-09 global crisis have sent investors chasing better yields in other currencies. That strengthens currencies with higher interest rates.

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