2.2.4 Net Trade (X-M)

• Exporting goods abroad


  Brings money into the country as there is an increase in AD
• Importing goods


  Means money leaves the country
• Net trade


  The total exports minus the total imports
• When real income in the UK is high

  There tends to be increased imports as people demand more goods and services and the UK is unable to meet their needs, decreasing net trade
• If an increase in real income is due to export-led growth

  Net trade will increase
• A strong pound (when the pound is worth a lot in comparison to other countries)

  Makes imports cheap and exports dear, decreasing net trade
• 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 price inelastic


  A rise in price only leads to a small fall in the amount of imports so the value of imports will rise
• If both imports and exports are price elastic

  A rise in the value of the pound will lead to a fall in net trade
• If the UK's main export country is doing well


  UK exports are likely to rise and so net trade is likely to rise
• If there is high protectionism on UK exports in other countries

  Exports will decrease as it will be harder for UK firms to sell their goods in other countries
• If there is high protectionism on imports into the UK

  Imports will decrease
• If the UK imposes protectionist measures


  Other countries are likely to retaliate and therefore exports are likely to decrease
• If UK goods are of a higher quality and design


  Exports will be high as foreign demand for UK goods will increase and imports will decrease, increasing net trade
• If UK goods are well marketed

  Exports will increase and imports will decrease, increasing net trade
• High prices of UK goods

  The volume of exports will decrease and the volume of imports will increase, decreasing net trade
• If the UK inflation rate is higher than other countries


  Prices will rise faster, decreasing net trade
• Higher productivity in the UK

  Leads to lower costs and so prices will be low, increasing net trade
• 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.
• During periods of economic growth

  Consumers have higher incomes and they can afford to consume more, increasing imports and decreasing net trade
• During periods of economic decline


  Real incomes fall and this has led to improvements in the UK's current account due to fewer imports
• 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
• A decline in economic growth in one of the UK's export markets


  There will be a fall in exports as consumer spending in those economies will fall, due to falling real incomes
• If the UK employed several protectionist measures

  The trade deficit will reduce as the UK will be importing less due to tariffs and quotas on imports to the UK
• Since protectionism leads to retaliation

  Exports might decrease too, which undoes the effect of reduced imports
• 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 or by having better infrastructure, increasing exports
• Trade deals and being part of trading blocs


  Can influence how much a country exports by either opening up a country to, or closing a country from, significant export opportunities
• Net Trade is the difference between a country's exports and imports of goods and services. If a country exports more than it imports, it has a trade surplus; if it imports more than it exports, it has a trade deficit.
• Higher net exports (trade surplus)

  Lead to an increase in domestic production and employment, raising real income and aggregate demand
• Lower net exports (trade deficit)

  Reduce domestic production and employment, resulting in a decrease in real income and aggregate demand
• A weaker domestic currency

  Makes exports cheaper for foreign buyers, boosting exports and increasing net trade
• A stronger domestic currency

  Makes imports cheaper for domestic consumers, leading to an increase in imports and a potential decrease in net trade
• A growing world economy

  May increase foreign demand for a country's exports, enhancing net trade and aggregate demand
• Changes in trade agreements or tariff policies

  Can impact a country's net trade position and aggregate demand
• High protectionism


  May limit imports, leading to a trade surplus, which increases aggregate demand and domestic production
• Low protectionism


  May encourage more imports, leading to a trade deficit, which can decrease aggregate demand and impact domestic industries
• High-quality and innovative products

  May attract higher demand from foreign consumers, boosting exports and improving net trade
• The appeal of foreign products due to unique features

  Can increase imports, affecting net trade and aggregate demand