Aggregate Demand

Curve, Components, and determinants

Determinant of Net Exports:

Relative changes in the income level

• Demand for one country’s export is the demand for imports in another

• This is dependent on income

Net Exports

difference btwn. the value of a country’s exports earnings and the value of its import expenditure.

Value comes from the product of the px. and the qty. of goods sold.

Determinant of Net Exports:

Domestic price relative to foreign prices

• Higher inflation rate increase the px. of g/s

eg.

• Country A has higher inflation rate than country B, its goods will be priced less competitively than country B.

• Country A residents substitute domestic goods for Country B’s goods

• Import expenditure in A increase

• A’s net exports then decrease

Determinant of Net Exports:

Exchange rate

• the price of one country’s currency in terms of another country’s currency

• can be referred as the external value

• PED analysis helps explain how this affects the value of Net Exports

Determinant of Net Exports:

Trade Protectionism

• restrictions to free international trade imposed by governments

• when imposed by another country the DD for exports drops

• the export earnings of one country decreases