2.2.5 Net trade (X – M)

Question 1

What are exports?

Answer 1

Exports are goods and services sold from one country to another.

Question 2

What factors affect demand for exports?

Answer 2

• Real income
• Relative prices of exports in world markets
• The exchange rate
• Non price demand factors e.g. design and branding, product quality, after-sales service
• Strength of aggregate demand in key export markets i.e. state of the world economy
• The level of protectionism e.g. use of tariffs, quotas, and other trade restrictions

Question 3

What is a tariff?

Answer 3

Tax on imports

Question 4

What is a quota?

Answer 4

A quota is a physical limit on the number of imports allowed into a country

Question 5

What is a trade surplus’s effect on AD?

Answer 5

A trade surplus means that the value of exports is greater than the value of imports – therefore aggregate
demand (AD) will increase

Question 6

What is a trade deficit’s effect on AD?

Answer 6

A trade deficit means that the value of imports is greater than the value of exports – therefore aggregate
demand will fall

Question 7

How does real income affect demand for exports?

Answer 7

• If domestic income is high, then demand for imports (which may offer more variety / choice, or be more luxurious) is likely to rise
• The UK has a relatively high “marginal propensity to import” (MPM) and so when UK income rises,
  demand for imports tends to rise too

Question 8

How does relative price of exports in world markets affect demand for exports?

Answer 8

This can be affected by domestic inflation, shipping/transport costs, fluctuations in world commodity prices etc

Question 9

How does the exchange rate affect demand for exports?

Answer 9

• A stronger currency makes exports more expensive and imports cheaper
• A weaker currency makes exports cheaper and imports more expensive