2.2.5 Net trade

NET TRADE

• exporting goods abroad brings money into the country as there is an increase in AD

• importing goods means money leaves the country

• net trade= total exports-total imports

INFLUENCES ON NET TRADE BALANCE

• real income

• exchange rates

• state of world economy

• degree of protectionism

• non-price factors

• prices

REAL INCOME

• when real income in UK is high, there tends to be increased imports as people demand more g and s and the UK is unable to meet their needs

• will mean that net trade decreases

• but if an increase in real income is due to export-led growth then net trade will increase- so effect of changes in real incomes is dependent on many factors

EXCHANGE RATES

• strong pound makes imports cheap and exports dear- costs foreigners more to buy pounds with their local currency

• so imports will increase and exports will decrease so net trade will decrease- depends on elasticity of imports and exports

• 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 inelastic, a rise in price only leads to a small fall in the amount of imports so the value of imports will rise

• same for exports: if prices rise and PED is inelastic then there will be a rise in value but if they are elastic then it will cause a fall in value

• if both imports and exports are elastic, rise in value of pound will lead to a fall in net trade

STATE OF WORLD ECONOMY

• if UK's main export country is doing well, then UK exports are likely to rise and so net trade will likely rise

• effect of the state of the world economy is dependent on which countries are doing well and the trade relationship the UK has with them

DEGREE OF PROTECTIONISM

• protectionism- an attempt to prevent domestic producers suffering from competition abroad

• tariffs, quotas and technical barriers are introduced- makes it harder for producers from abroad to sell their goods in UK

• if theres high protectionism on UK exports in other countries, they will decrease as it will be harder for UK firms to sell their goods in other countries

• if theres high protectionism on imports into UK, they will decrease

• if UK imposes protectionist measures, other countries are likely to retaliate and exports will likely decrease

• free trade means that net trade will be a more significant part of AD, whether this be in a pos or neg sense

NON-PRICE FACTORS

• 2 non-price factors which affect net trade:

  • quality

  • design and marketing

• 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 as people will buy British goods instead of foreign goods- means net trade will increase

• if UK goods are well marketed, people will have a stronger desire to buy British goods so exports will increase and imports will decrease- net trade will increase

• strong quality/design and marketing will mean that British exports are likely to be more inelastic

PRICES

• high prices of UK goods will mean that the goods are less competitive compared to international goods since people make decisions partly based on price

• means exports will decrease and imports will increase

• prices are affected by:

  • the inflation rate-if UK inflation rate is higher other countries, prices will rise faster

  • also affected by productivity in UK (output per worker) as higher productivity leads to lower costs and so prices will be low

• effects of changing prices on the value of imports and exports depends on the PED

  • if PED is elastic, then higher prices will lead to a fall in net trade