2.2.5 Net Trade

• Exports minus imports

  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.
• During periods of economic growth, when consumers have higher incomes


  There is a larger deficit on the current account.
• When consumers increase their spending

  They consume more domestic products as well as more imports.
• During periods of economic decline, real incomes fall


  This has historically led to improvements in the UK's current account.
• A depreciation of the pound


  Imports are more expensive, and exports are cheaper, so the current account trade deficit narrows.
• Depreciations make the currency relatively more competitive against other currencies.
• If the pound depreciates against the dollar or euro


  It is likely to have a more significant effect, than a currency which is not from one of the UK's major trading partners.
• If demand for UK exports is price inelastic


  Exports will not increase significantly, and the value of exports will decrease.
• A decline in economic growth in one of the UK's export markets

  There will be a fall in exports.
• The UK's largest export market is the EU.
• If the EU faces an economic downturn

  Demand for UK goods and services will fall, since consumers in the EU are less able to afford imports.
• Protectionism


  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

  The trade deficit will reduce 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.
• Factors that can increase a country's competitiveness and exports

  • Being innovative
  • Having higher quality goods and services
  • Operating in a niche market
  • Having lower labour costs
  • Being more productive
  • Having better infrastructure
• Trade deals and being part of trading blocs can influence how much a country exports. This either opens up a country to, or closes a country from, significant export opportunities.