Net Trade (X-M)
- The value of net trade stems down to amount of money received from exports, minus the amount of money spent on importing goods.
- This is the same value that is on the current account on the balance of payments. Hence if the current account has a positive value, it implies exports are greater than imports (current account surplus). However a negative value would suggest imports exceed exports (current account deficit).
There are a total of 5 influences for the net trade balance:
- Real income – if real incomes rise, then people will consume more imported goods as well as domestic goods, as a result the current account deficit will increase, and AD will fall.
- Exchange rates – a stronger currency will mean imports will be cheaper and exports will be more expensive, and as a result this will increase the deficit on the current account. However, if demand for exports is inelastic, varying exchange rates won’t have a huge impact.
- State of the world economy – if mass economic growth occurred worldwide, consumer spending abroad would rise, and this would boost UK exports, consequently increasing aggregate demand.
- Degree of protectionism – protectionism guards a country’s industry from competition, ensuring they can still make a fair profit. Quotas (physical limits on trade), tariffs (taxes on imports and exports) as well as domestic subsidies are all used for this particular purpose. This can help boost net trade and increase AD.
- Non-price factors – various non-price factors have a mass influence on net trade. For example, China is a hugely populated country, allowing for masses of industry to be present, hence producing massive quantities of goods for exporting. Moreover, Kenya’s climate is ideal for their cut-flower industry, allowing fast production with high exports.