2.2.5 Net Trade (X-M)

What is real income?

Real income refers to the income of individuals or nations adjusted for inflation, reflecting true purchasing power.

How does an increase in domestic real income affect the trade balance?

Higher real incomes typically lead to increased consumption, including more imports, which can worsen the trade balance.

Example: Rising real incomes in the U.S. often increase imports from China.

How does an increase in foreign real income affect the trade balance?

Higher real incomes abroad can lead to increased demand for a country’s exports, improving the trade balance.

Example: Economic growth in China has boosted imports from countries like Germany.

Why might a currency depreciation initially worsen the trade balance according to the J-curve effect?

Because contracts and import/export volumes take time to adjust, causing the trade balance to worsen short-term before improving

What is the Marshall-Lerner condition?

It states that a currency depreciation improves the trade balance only if the combined price elasticities of exports and imports exceed one.

What effect does increased protectionism have on a country’s trade balance?

It typically strengthens the trade balance by reducing imports.

What are exchange rates?

Exchange rates are the value at which one currency can be exchanged for another.

How does a depreciation in the exchange rate affect the trade balance?

A weaker domestic currency makes exports cheaper and imports more expensive, potentially improving the trade balance.

Example: Post-Brexit depreciation of the British pound boosted UK exports.

How does an appreciation in the exchange rate affect the trade balance?

A stronger domestic currency makes exports more expensive and imports cheaper, potentially worsening the trade balance.

Example: Appreciation of the Swiss franc has made Swiss exports less competitive.

What is meant by the state of the world economy?

It refers to the overall health and trends of global economic activity.

How does global economic growth affect the trade balance?

Strong global demand increases export opportunities, improving trade balances in export-led economies.

Example: The early 2000s boom increased exports from emerging markets.

How do global recessions affect the trade balance?

Reduced global demand negatively impacts exports, worsening the trade balance for export-reliant countries.

Example: The 2008 financial crisis reduced exports from Germany and Japan.

What is protectionism?

Protectionism refers to government actions and policies that restrict international trade to protect domestic industries and jobs.

How does high protectionism influence the trade balance?

Tariffs and quotas can reduce imports, potentially improving the trade balance but risking retaliatory actions.

Example: The U.S.-China trade war involved high tariffs that lowered trade volumes.

How does low protectionism influence the trade balance?

Open trade policies increase imports, which may worsen the trade balance but encourage competition and efficiency.

Example: The EU’s single market increases trade volumes among member states.

What are non-price factors in trade?

These include product quality, innovation, branding, and trade agreements that influence trade flows without involving price changes.

How do quality and innovation affect trade performance?

High-quality, innovative products can drive export success despite price fluctuations.

Example: German engineering in cars and machinery supports exports.

How does branding influence exports?

Strong brand recognition sustains demand for a country’s exports.

Example: Apple’s global reputation supports high demand for U.S. tech exports.

How do trade agreements affect the trade balance?

Trade agreements reduce barriers, enhancing trade flows and potentially improving the trade balance.

Example: NAFTA boosted trade between the U.S., Canada, and Mexico.

What is the net trade balance?

It is the difference between the value of a country’s exports and the value of its imports.

What are tariffs?

Tariffs are taxes imposed on imported goods to make them more expensive and less attractive to consumers.

What are trade agreements?

Trade agreements are treaties between countries designed to reduce trade barriers and promote international commerce.

Who was David Ricardo and what did he contribute to trade theory?

Ricardo developed the theory of comparative advantage, advocating for free trade and specialization between nations.

What did Paul Krugman contribute to trade economics?

Paul Krugman contributed to new trade theory, which focuses on economies of scale and network effects in international trade.

What is the Heckscher-Ohlin model and who developed it?

Developed by Bertil Ohlin and Eli Heckscher, it explains trade based on countries’ relative factor endowments like land, labor, and capital.