2.2.5 - net exports

what is the net trade balance

the difference between the value of exports and imports

aka (X-M)

what influences the net trade balance

changes to real income

exchange rates

state of the world economy

degree of protectionism

define exchange rates

the price of one currency in terms of another

define protectionism

gov policies that restrict intl trade in order to protect domestic industries

eg. TARRIFS

what happens to exports, imports, and the trade balance when…

…UK real income increases

exp: little effect

imp: consumers purchase more (imports are normal goods)

tb: weakens bc more imports

what happens to exports, imports, and the trade balance when…

…real income increases abroad

exp: increase (more ppl abroad buy UK goods)

imp: little effect

tb: strengthens bc more exports

what happens to exports, imports, and the trade balance when…

…UK £ appreciates

exp: less bc they become more expensive for ppl abroad

imp: more bc they become cheaper for UK ppl

tb: weakens bc more imp, less exp

same VICE VERSA

whats an acronym we can use to remember the effect of exchange rates on net exports

SPICED:

strong

pound

imports

cheaper

exports

dearer

what happens to exports, imports, and the trade balance when…

…world economy booms

exp: more bc more demand

imp: little effect

tb: strengthens bc more exports

what happens to exports, imports, and the trade balance when…

…world economy slows

exp: less bc decreased demand

imp: little effect

tb: weakens bc less exports

what happens to exports, imports, and the trade balance when…

…protectionism increases (of the UK)

exp: depends on other countries’ retaliation measures

imp: less bc they are more expensive

tb: strengthens (but depends on exp)

what happens to exports, imports, and the trade balance when…

…protectionism decreases

exp: likely to increase (but depends if there were any retaliation measures from other countries in the first place)

imp: increase bc they are cheaper

tb: weakens (but depends on exp)

whats an evaluation point for the extent to which the trade balance weakens/strengthens bc of exchange rates

dependent on PED of the exports/imports