Net Trade Flashcards
Net trade- exports minus imports
This is the value of the current account on the balance of payments. A positive value indicates a surplus, whilst a negative value indicates a deficit. The UK has a relatively large trade deficit, which reduces the value of AD.
The main influences on the (net) trade balances: real income
-During periods of economic growth, consumers have higher incomes and they can afford to consume more. This means they are likely to import more so there is a larger deficit on the current account.
-During periods of economic decline, real incomes fall and historically, this has led to improvements in the UKs current account due to fewer imports.
-incomes have little impact on exports.
The main influences on the (net) trade balances: exchange rates
A depreciation of the pound means imports are more expensive and exports are cheaper, so the current account trade deficit narrows as people are less likely to buy imports and more likely to buy exports (SPICED)
-Depreciations make the currency relatively more competitive against other currencies.
-However, it depends on which currency the pound depreciated against. If it is the dollar or euro it is likely to have a more significant effect, than a currency which is not from one of the UKs major trading partners.
-Moreover, the demand for UK exports has to be price elastic to lead to an increase in exports. If demand is price inelastic, exports will not increase significantly, and the value of exports will decrease.
The main influences on the (net) trade balances: state of the world economy
-A decline in economic growth in one of the UKs export markets means there will be a fall in exports. This is because consumer spending in those economies will fall, due to falling real incomes.
-For example, the UKs largest export market in the EU. If they face an economic downturn then demand for UK goods and services will fall, since consumers in the EU are less able to afford imports.
The main influences on the (net) trade balances: Degree of protectionism
-Protectionism is the act of guarding a country’s industries from foreign competition. It can take the form of tariffs, quotas,regulation or embargoes.
-If the UK employed several protectionist measures, then the trade deficit will reduce. This is because the UK will be importing less due to tariffs and quotas on imports to the UK.
-However, since protectionism leads to retaliation, exports might decrease too, which undoes the effect of reduced imports.
The main influences on the (net) trade balances: Non-price factors
-The competitiveness of a country’s goods and services, which is influenced by supply-side policies, impacts how many exports the country has.
-A country can become more competitive by being innovative, having higher quality goods and services, good advertising and marketing, strong customer service and operating in a niche market, having lower labour costs, being more productive and by having better infrastructure. These increase exports.
-Moreover, trade deals and being part of trading blocs can influence how much a country exports. This either opens up a county to, or closed a country from, significant export opportunities.
