2.2.5 - Net Trade (X-M) Flashcards
Define Net Exports
. Refers to exports minus imports (X-M)
Name the factors that affect Net Exports (X-M)
These are factors that affect both exports and imports
. Real Income
. Exchange Rate
. Non - price factors
. State of world economy
. Degree of Protectionism
Explain Real Income in domestic economy
. If the economy is an boom, with wages increasing and unemployment decreasing, individuals will have more disposable income, increasing their marginal propensity to consume
. Part of this spending will be imported goods and services from foreign countries. Therefore, a rise in domestic income, means that the value of net exports decreases, due to imports of goods and services. IF there is more spending on imported goods, AD falls causing a contracting from AD1 to AD2, resulting in economic decline,
Explain Exchange rate
1.) The exchange rate is the price at which one currency is sold for another
. A rise in the value of the pound (strong exchange rate)means that it cost more for foreigners to buy pounds with their local currency. This makes exports from the UK less price competitive, and hence revenue from exports falls
. Additionally, a rise in the value of the pound means that UK buyers can buy more foreign currencies at a cheaper price. This means that imports become more price competitive to UK buyers. This means that expenditure on imports increases, and revenue from exports decreases
. Both these affects reduce the value of (X-M), thus resulting in a decrease in AD, with AD shifting to the left from AD1 to AD2
However, this only occur if the foreign goods are price elastic. If the goods are instead price inelastic, it means a there will not be as demand for the foreign products, which means that the value of net exports would be as low.
2.) A fall in the value of the pound (weak exchange rate) makes exports cheaper and imports dearer. This means the demand for imports and therefore expenditure on imports decrease whereas the demand for exports and therefore the revenue generated by exports will increase. This increases net exports, leading to an increase in AD and hence economic growth.
Explain Degree of Protectionism
. All countries limit the ways goods and services come into their economies
. For example, a country may tariffs on imports. A tariff is a tax on an import
. The greater the degree of protectionism, the more difficult and more costly it is for UK firms to export.
. This also increases the cost of production for suppliers or firms, resulting in a shift to the left from SRAS1 to SRAS2. This means that there there will be an increase in price equilibrium and fall in output in the economy, as there are less consumers will and able to purchase goods ands services after the higher prices
. UK was once part of the EU, meaning that import tariffs very very low
. However, the UK left EU, through Brexit in 2020, meaning that import tariff will be high when exporting. This means less exports of goods and services, due to higher cost of production. This reduces the value of the net trade balance
Explain non - price factors
. The competitiveness of a country’s goods and services impacts how many exports the country has
. A country can be more competitive by being innovative, having higher quality goods and services (e.g. faster delivery time) or having better infrastructure (e.g. more better ports). These increase exports and causes an increase in net exports, which shift AD from AD1 to AD2 causing economic growth.
Explain state of the world economy
If the world economy is experiencing economic growth, then UK exports are likely to rise. This is as during a boom there is likely to be high employment, which means more disposable income, hence consumption increases. This means that there for the domestic country will have exports from abroad.
This means that the net exports increases, which increase AD from AD1 to AD2, which means economic growth.
