2.2.5 Net Trade (X-M)

Question 1

What is the net trade balence?

Answer 1

Exports - imports.

Question 2

What influences the net trade balence?

Answer 2

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

Question 3

How does real income effect the trade balance?

Answer 3

• high real income causes imports to increase (demand more g/s and uk econ can’t meet demands). Causing net trade to decrease.
• higher incomes can increase D for uk goods thus making exports less competitive.
• higher income may lead to appreciation in currency which makes imports mor expensive.
• higher income increases investment therefore exports are more competitive.

Question 4

How does exchange rates effect the net trade?

Answer 4

• STRONG pound = imports are cheaper + exports more pricey. (Imports will increase exports decrease = decrease in net trade.
• imports that are elastic will mean that large increase in price will mean D falls but inelastic only small fall thus value of imports will increase.
• elasticities same for exports.