2.2.5 - Net trade (X-M)

Question 1

State the main influences on the (net) trade balance

Answer 1

The main influences on the (net) trade balance:
o real income
o exchange rates
o state of the world economy
o degree of protectionism
o non-price factors

Question 2

State the influence of non-price factors on net trade balance

Answer 2

• quality of goods
• advancements in technology in a country =production of high quality of goods = an increase in exports from that country as people are willing to pay more for something if it’s really good therefore there is an improvement in their exports

Question 3

State the influence of degree of protectionism on net trade balance

Answer 3

• short run at tariffs and quotas can increase net exports by reducing imports
• BUT .. industries that are protected from international competition have few incentives to become more efficient so will often export less in the long run
• also in the long run other countries may retaliate by introducing their own tariffs and quotas

Question 4

State the influence of real incomes on net trade balance

Answer 4

• The higher a country’s real income the more it tends to import therefore net exports fall as a real income rises
• The state of the world economy also affects exports and imports - if a country goes through a period of low growth and exports from that country to other countries will decrease assuming imports are unaffected net exports for the country going through negative economic growth is worsened

Question 5

State the influence of exchange rates on net trade balance

Answer 5

REF TO CGP PAGE 141

Question 6

Define protectionism

Answer 6

Restricting trade through tariffs and other forms of import controls such as quotas.

Question 7

Define exchange rate

Answer 7

Exchange rates are the price of one country’s’ currency in relation to another.

Question 8

define net trade

Answer 8

The balance between the monetary value of exports and imports.

Question 9

Effects of the trade cycle

Answer 9

• recession, the government increase spending in order to increase demand to reduce unemployment.
• Government spending also automatically rises during a recession as they have to spend more on unemployment benefits.
• booms, the government decrease spending to decrease demand and reduce inflation.