2.2 - Net trade

Question 1

What are the main influences on the net trade balance?

Answer 1

• real income
• exchange rates
• state of the world economy
• degree of protectionism
• non-price factors

Question 2

Real Income

Answer 2

Real income refers to the income of individuals or nations adjusted for inflation and so reflects the purchasing power of the income

Question 3

Impact of real income on net trade balance

Answer 3

• Domestic Income Increases: Higher real incomes typically lead to increased consumption, including imported goods, potentially worsening the trade balance/net trade decreases
  > However, if an increase in real income is due to export-led growth then net trade will increase.
• Foreign Income Increases: Higher real incomes abroad can boost demand for exports from other countries, improving the trade balance.

Question 4

Impact of Exchange Rates on net trade balance

Answer 4

• Depreciation: A weaker domestic currency makes exports cheaper and imports more expensive, potentially improving the trade balance.
• Appreciation: A stronger domestic currency makes exports more expensive and imports cheaper, potentially worsening the trade balance. (exports become less price competitive)

Question 5

Impact of state of world economy on net trade balance

Answer 5

• Global Economic Growth: When the global economy is strong, demand for goods and services increases, benefiting exporting countries.
  > Example: The global economic boom in the early 2000s increased demand for exports from emerging markets.
• Global Recessions: During economic downturns, global demand drops, negatively affecting export-dependent countries

Question 6

State of the World Economy

Answer 6

The overall health and trends of the global economy.

Question 7

Impact of Degree of protectionism on net trade balance

Answer 7

• High Protectionism: Tariffs, quotas, and other trade barriers can reduce imports, potentially improving the trade balance but also risking retaliatory measures.
• Low Protectionism: More open trade policies can increase imports, potentially worsening the trade balance but promoting competition and efficiency.

Question 8

Non-price factors

Answer 8

These include aspects other than price that affect competitiveness and therefore trade, such as quality, innovation, branding, and trade agreements.

Question 9

Impact of non-price factors on net trade balance

Answer 9

• Quality and Innovation: High-quality, innovative products can maintain strong export performance despite price changes.
• Branding: Strong brand recognition can sustain demand for exports.
• Trade Agreements: Agreements can reduce barriers and enhance trade flows.