2.2.5: Influences on Net Trade (X-M)

Question 1

What are some key influences on the net trade balance?

Answer 1

1. Real Income: the income of individuals or nations adjusted for inflation.
2. Exchange rates: the value of one currency for the purpose of conversion to another.
3. State of the World Economy: The overall health and trends of the global economy.
4. Degree of Protectionism: government actions and policies that restrict international trade to protect local businesses and jobs.
5. Non-Price Factors: These include aspects other than price that affect trade, such as quality, innovation, branding, and trade agreements.

Question 2

How does real income influence net trade balance?

Answer 2

1. Domestic Income Increases: Higher real incomes typically lead to increased consumption, including imported goods, potentially worsening the trade balance. Example: In the U.S., rising real incomes often correlate with increased imports from China and other countries.
2. Foreign Income Increases: Higher real incomes abroad can boost demand for exports from other countries, improving the trade balance. Example: Economic growth in China has increased its imports from countries like Germany and Australia.

Question 3

How do exchange rates influence net trade balance?

Answer 3

1. Depreciation: A weaker domestic currency makes exports cheaper and imports more expensive, potentially improving the trade balance. Example: The depreciation of the British pound post-Brexit referendum initially boosted UK exports.
2. Appreciation: A stronger domestic currency makes exports more expensive and imports cheaper, potentially worsening the trade balance. Example: The appreciation of the Swiss franc has made Swiss goods more expensive abroad, impacting their trade balance.

Question 4

How does the state of the world economy influence net trade balance?

Answer 4

1. 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.
2. Global Recessions: During economic downturns, global demand drops, negatively affecting export-dependent countries. Example: The 2008 financial crisis reduced global demand for exports from countries like Germany and Japan.

Question 5

How does protectionism influence net trade balance?

Answer 5

1. High Protectionism: Tariffs, quotas, and other trade barriers can reduce imports, potentially improving the trade balance but also risking retaliatory measures. Example: The U.S.-China trade war saw increased tariffs leading to reduced trade volumes.
2. Low Protectionism: More open trade policies can increase imports, potentially worsening the trade balance but promoting competition and efficiency. Example: The European Union’s single market facilitates free trade among member countries, increasing trade volumes.

Question 6

How do non-price factors influence net trade balance?

Answer 6

1. Quality and Innovation: High-quality, innovative products can maintain strong export performance despite price changes. Example: Germany’s reputation for high-quality engineering supports strong export performance in automotive and machinery sectors.
2. Branding: Strong brand recognition can sustain demand for exports. Example: Global demand for American technology brands like Apple.
3. Trade Agreements: Agreements can reduce barriers and enhance trade flows. Example: The North American Free Trade Agreement (NAFTA) boosted trade between the U.S., Canada, and Mexico.