2.2.5 Net trade (X-M)

Question 1

Net trade

Answer 1

Exporting goods abroad brings money into the country as there is an increase in AD whilst importing goods means money leaves the country. Net trade is the ​total exports minus the total imports.

Question 2

Influences on net trade

Answer 2

Real income
Exchange rates
State of world economy
Degree of protectionism
Non-price factors
Prices **

Question 3

Real income: influence of net trade

Answer 3

When real income in the UK is high, there tends to be increased imports as people demand more goods and services and the UK is unable to meet their needs. This will mean that net trade decreases. However, if an increase in real income is due to export-led growth then net trade will increase. Therefore, the effect of changes in real incomes is dependent on many factors.

Question 4

Exchange rates: influence on net trade balance

Answer 4

A strong pound (when the pound is worth a lot in comparison to other countries) makes imports cheap and exports dear because it costs foreigners more to buy pounds with their local currency. As a result, imports will increase and exports will decrease so net trade will decrease. This depends on the elasticity of imports and exports. If imports are price elastic, a rise in price will cause a large fall in demand so the value of imports will fall. If imports are inelastic, a rise in price only leads to a small fall in the amount of imports so the value of imports will rise. This is the same for exports: if prices rise and PED is inelastic then there will be a rise in value but if they are elastic then it will cause a fall in value. If both imports and exports are elastic, a rise in the value of the pound will lead to a fall in net trade. This is looked at in more detail in Theme Four (4.1.8)

Question 5

State of world economy: influence on net trade

Answer 5

If the UK’s main export country is doing well, then UK exports are likely to rise and so net trade is likely to rise. The effect of the state of the world economy is dependent on which countries are doing well and the trade relationship the UK has with them.

Question 6

Degree of protectionism: influence on net trade balance

Answer 6

Protectionism is an attempt to prevent domestic producers suffering from competition abroad. Tariffs, quotas and technical barriers are introduced which makes it harder for producers from abroad to sell their goods in the UK. 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 there is high protectionism on imports into the UK, imports will decrease. If the UK imposes protectionist measures, other countries are likely to retaliate and therefore exports are likely to decrease. Free trade means that net trade will be a more significant part of AD, whether this be in a positive or negative sense.

Question 7

Non-price factors: influence on net trade balance

Answer 7

Two non-price factors which affect net trade are quality and design and marketing. If UK goods are of a higher quality and design, exports will be high as foreign demand for UK goods will increase and imports will decrease as people will buy the British goods instead of foreign goods. This means net trade will increase. If UK goods are well marketed, people will have a stronger desire to buy British goods so exports will increase and imports will decrease, so net trade will increase. Strong quality/design and marketing will mean that British exports are likely to be more inelastic.

Question 8

Prices **: influence on net trade balance

Answer 8

High prices of UK goods will mean that the goods are less competitive compared to international goods since people make decisions partly based on price. This means the volume of exports will decrease and the volume of imports will increase Prices are affected by the inflation rate: if the UK inflation rate is higher than other countries, prices will rise faster. They are also affected by productivity in UK (output per worker) as higher productivity leads to lower costs and so prices will be low. The effects of changing prices on the value of imports and exports depends on the price elasticity of demand. If PED is elastic, then higher prices will lead to a fall in net trade.