2.2.5 Net Trade (X-M) Flashcards
Exporting
Exporting is the act of selling goods and services to another country . Income from exports counts as an injection into the circular flow of income and adds to aggregate demand ( AD ) .
Importing goods
Importing goods means money leaves the country
Net trade
Net trade is the total exports minus the total imports
The trade balance
The trade balance is the difference between the value of exports and imports . When the value of exports is greater than the value of imports , the trade balance is in surplus . When the value of imports is greater than the value of exports , the trade balance is in deficit .
Trade Surplus ( Positive Net Trade Balance )
A trade surplus adds to net exports , which in turn increases aggregate demand
Trade Deficit ( Negative Net Trade Balance )
A trade deficit subtracts from net exports , leading to a reduction in aggregate demand
Real Income
Real income refers to the income of individuals or nations adjusted for inflation .
How does real income influence the trade balance?
Domestic Income Increases: Higher real incomes typically lead to increased consumption, including imported goods, potentially worsening the trade balance. Example: In the U.S., rising real incomes often correlate with increased imports from China and other countries.
Foreign Income Increases: Higher real incomes abroad can boost demand for exports from other countries, improving the trade balance. Example: Economic growth in China has increased its imports from countries like Germany and Australia.
How do exchange rates influence the trade balance?
Depreciation reduces export costs and import costs, potentially improving the trade balance. For instance, the British pound’s depreciation boosted exports after Brexit.
Appreciation raises export costs and lowers import costs, potentially worsening the trade balance. For example, the Swiss franc’s appreciation made Swiss goods more expensive abroad, affecting their trade balance.
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 imports so the value of imports will rise. This 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 the value of the pound will lead to a fall in net trade.
Exchange Rates
Exchange rates are the value of one currency for the purpose of conversion to another .
State of the World Economy
The overall health and trends of the global economy .
How does the state of the world economy influence the trade balance?
Global Economic Growth: When the global economy is strong , demand for goods and services increases , benefiting exporting countries . Example: The global economic boom in the early 2000s increased demand for exports from emerging markets
Global Recessions: During economic downturns , global demand drops , negatively affecting export - dependent countries . Example: The 2008 financial crisis reduced global demand for exports from countries like Germany and Japan .
How does the degree of protectionism influence the trade balance?
High protectionism reduces imports, potentially improving the trade balance but risking retaliation. For instance, the U.S.-China trade war saw increased tariffs leading to reduced trade.
Low protectionism increases imports, potentially worsening the trade balance but promoting competition and efficiency. The European Union’s single market facilitates free trade among member countries, boosting trade volumes.
Protectionism
Protectionism refers to government actions and policies that restrict international trade to protect local businesses and jobs .
Non - Price Factors influencing net trade
These include aspects other than price that affect trade , such as quality , innovation , branding , and trade agreements .
How do non-price factors influence the trade balance?
Quality and innovation maintain strong export performance despite price changes. Germany’s reputation for high-quality engineering supports automotive and machinery exports.
Strong brand recognition sustains export demand. Global demand for American technology brands like Apple sustains demand.
Trade agreements reduce barriers and enhance trade flows. NAFTA boosted trade between the U.S., Canada, and Mexico.
David Ricardo
Developed the theory of comparative advantage , emphasizing the benefits of free trade and specialization
Paul Krugman
Contributed to new trade theory , explaining the role of economies of scale and network effects in international trade .
Bertil Ohlin
Co - developed the Heckscher - Ohlin model , which explains trade patterns based on factor endowments ( land , labor , and capital ) .
Tariffs
Taxes imposed on imported goods to make them more expensive and less attractive to consumers .
Trade Agreements
Treaties between two or more countries to facilitate trade by reducing trade barriers .
