2.2.5 Net Trade Flashcards
What is Net Trade?
The value of exports minus the value of imports
How does real income influence the trade balance?
When real income in the UK is high, there tends to be more importing as the UK cannot meet the increased demand.
However, if an increase in real income is due to export - led growth then net trade will increase.
How do exchange rates influence the net trade balance.
A stronger pound makes imports cheap and exports dear.
This depends on the elasticity of imports and exports (Marshal Leiner Condition).
How does the state of the world economy influence the net trade balance.
If the UK’s main export country is doing well, then UK exports are likely to rise and so net trade is likely to follow.
How does the degree of protectionism influence the trade balance?
If there is high protectionism on UK exports in other countries, exports will decrease as it will be harder for UK firms to sell their goods in other countries.
If the UK has high protectionist measures on imports into the UK - imports will decrease. However, this could result in retaliation potentially reducing exports as well.
How do non price factors influence net trade?
If quality and design marketing are strong for UK goods, exports will be high as more people want to buy UK goods.
Imports will also decrease as UK residents choose the higher quality UK goods compared to importing from abroad.
How do prices affect the Trade Balance?
Higher prices of UK goods means they are less competitive compared to international goods. This means the volume of exports decreases and imports could increase.
Prices are affected by inflation - if the UK inflation rate is higher than abroad - the volume of exports will fall. This also goes for UK worker productivity.
