Net exports

net exports definition

The value of the nation's total trade. It is the value of a nation's total exports (X) of goods and services minus the value of all the goods and services it imports (M)​
Stat: Net exports made up -1% of UK GDP in 2018 (+29% for exports -30% for imports)​

BoP Breakdown:

Capital Account: Mainly records the movement of assets associated with migration or acquisition/disposal of non-money assets ​
Financial Account: Records international investments and transactions in financial assets ​
Current Account: A record of all payments for trade in goods and services plus income flow it is divided into four parts​
Trade in goods, trade in services, income, and current transfers

Key question: Why is net exports (X-M) the only part of the balance of payments included in AD?

As the other components do not record new output, just the movement of already accounted for assets

Determinants of Net Exports​

Exchange rates
Domestic real income
Changes in world economy
Degree of protectionism
International competitiveness

Exchange rates

changes in exchange rates can affect the attractiveness of exports to foreign households and imports to domestic households​
Exchange rates: the value of one currency in terms of another​

SPICED: Strong Pound, Imports Cheap, Exports Dearer
WPIDEC: Weak Pound, Imports Dearer, Exports Cheap

SPICED

Strong Pound, Imports Cheap, Exports Dearer​
An increase in the value of the domestic currency means domestic consumers can convert a given amount of their currency into a larger amount of a foreign one, allowing them to buy more imports. M increases.​
Similarly foreign households can convert their currency into a decreased amount of domestic currency meaning they can't buy as many exports. X decreases. ​

WIPDEC

Weak Pound, Imports Dearer, Exports Cheap​
Domestic households can afford fewer imports. M decreases​
Foreign households can afford more exports. X increases.​

Domestic Real income

As households get richer they buy more G&S, including imports​
The extent to which M rises from increased real income depends on a nation's marginal propensity to import (MPM)​

Foreign Real income

Similarly, as foreigners get richer they buy more G&S, including our exports​

Changes in the world economy

As different economies change and develop they tend to trade different imports and exports with the rest of the world​
For the UK, as we export more services (strong positive values of YED) this will likely mean our net exports improve as global income rises, relative to other countries​
However, for developing countries that export more basic products, which have lower or even negative YED, their net exports will likely worsen​

Degree of protectionism

Falling protectionism means that free trade broadens, giving rise to new export opportunities​
However, protectionist measures can restrict exports​
These include tariffs, quotas and regulations​

International competitiveness

If domestic output becomes more competitive, they are more attractive to all buyers. This can increase exports and reduce imports​

Price Competitive

our exports are cheaper than foreign alternatives​

Non-Price Competitive

our exports are better quality compare to foreign alternatives​