Difference Between Export Price and Domestic Price
In theory, the export price of an object or commodity should be equal to its domestic price in the country of production. Yet, in reality, there is a major disagreement in these two prices. Export prices depend on many external factors that are far beyond the dynamics of production of goods. It is important to analyze the forces that cause these changes in export prices of items.
The taxes and tariffs are the most important factor that is responsible for the increase in export prices of items. Different countries apply different tariffs for different items. This is mainly done to safeguard the interests of domestic producers of that article. For example, if iron ore is found in great quantities in India and another country imports it from India, it should impose high tariffs on Indian ore to protect the profits of producers of ore in their country. Otherwise, Indian ore will be in greater demand due to its lower price, and the local producers will run at a loss. The iron ore producing companies in that country will have to close down.
There are situations when the export price of a certain item is fixed lower than the domestic price. This is done with a purpose: competitors are kept at bay in the international market. China is a good example. They heavily subsidize electronic goods produced there to enable its exporters to have unfair advantage in the international market to promote its exports.
Sometimes, the exporters realize that due to tariffs imposed by the importing countries, their commodities become more expensive than their domestic price, they try to move their products to domestic markets. This causes the price to further fall in the domestic market. If, however, there is a deficiency of a certain article in the international market, its export prices are much higher than the domestic prices and they make huge profits to the exporters.