2.2.5 - Net trade

Question 1

What are the main influences on net trade?

Answer 1

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

Question 2

What is real income?

Answer 2

Income adjusted for inflation

Question 3

How does real income affect net trade?

Answer 3

When real income increases, higher MPM - more imports. Higher living standards and the capacity to consume better quality goods and services. Signifies a change in consumption and a leakage out of the circular flow.

Question 4

How do exchange rates impact net trade?

Answer 4

Appreciation = cheaper imports, more expensive exports. Lower demand for exports = negative net trade however value of imports is lower.

Question 5

How do the state of the world economy affect net trade?

Answer 5

If global economy is buoyant (especially major trading partners), demand for economies exports will rise. Could lead to higher imports of raw materials.

Question 6

How does the degree of protectionism affect net trade?

Answer 6

Tariffs, subsidies and quotas reduce demand for foreign exports or limit imports.

Question 7

How do non-price factors affect net trade?

Answer 7

Quality, unique design, next day delivery, after sales service, delivery times, warranty. These are some other factors that determine demand for exports and imports.