6- Net trade (X-M)

Question 1

What are the main influences of (net) trade balance?

Answer 1

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

Question 2

How does real income affect net trade balance?

Answer 2

• As consumers’ real income increases demand for goods and services rises.
• This will lead to a rise in the demand for imports dependant on the marginal propensity to import.
• The amount of additional income that households spend on imports.

Question 3

How exchange rates affect net trade balance?

Answer 3

• A strengthening currency will make UK exports less competitive.
• Demand may fall.
• A stronger currency will also make imports more attractive in the UK consumers and they may increase.
• Net exports will therefore worsen
• A weaker currency should have the opposite effect and improve net exports.

Question 4

S.P.I.C.E.D?

Answer 4

S trong
P ound
I mports
C heap
E xports
D ear

Question 5

How changes in the state economy affects net trade balance?

Answer 5

• As global demand changes so will imports and exports.
• A strong economy will import goods and services in order to meet its needs.
• This might lead to an increase in domestic consumption.
• If an economy increases its productive capacity by utilising FoP it can increase its supply to the world
• As developing countries see economic growth, the state of the world economy changes as does the pattern of imports and exports

Question 6

How degree of protectionism affects net trade balance?

Answer 6

• As free trade broadens e.g. enlargement of the EU gives rise to new export opportunities.
• However protectionist measures help to restrict imports:
• Tariffs e.g. tax on imports
• Quotas e.g. a restriction on the number of imports.
• Government regulations e.g. increasing safety standards to increase cost for importers.

Question 7

How non-price factors affect exports and imports?

Answer 7

Exports will increase if:

• Real GDP of other countries increases.
• Changes in tastes and fashion lead to interest in products
• Price inelastic exports are likely to see volume sales but an increase in total revenue.
• Productive capacity increases allowing for greater sales of a product
• Product differentiation leads to a greater demand for products