3.9 - net exports (aggregate demand)

trade surplus

• exports > imports

• increased AD

trade deficit

• exports < imports

• domestic growth > AD

• decreased AD

factors affecting net exports: real disposable income abroad

• economic growth in UK trading partners

• can increase demand for UK goods abroad

• UK exports increase, net exports increase, AD increases

why may real disposable income abroad not affect net exports?

• depends on what G/S are exported

• if you sell poor quality goods, wealthier people will expect cool luxury goods

real disposable income at home

• direct relationship with imports

• imports/marginal propensity to import/luxury goods and services/investment (all increase)

• net exports/AD decrease

why may real disposable income not affect net exports

• imported goods may be of low quality

factors affecting net exports: domestic price levels

• increase in cost of production

• UK firms must sell to other, international firms

• loses international competiveness (lower demand for UK exports)

• export prices higher

• also if domestic prices are high, people buy abroad (net exports and AD decrease)

why may domestic price levels not impact net exports?

• global inflation (no relative change)

• inelastic demand (people really need the goods)

factors affecting net exports: exchange rates

• if the GBP appreciates it gains strength (meaning I can get more USD)

• imports increase, we can buy more G/S using less money

• AD/exports decrease, as good are more expensive to buy

why my exchange rates not affect net exports? 

• domestic firms can find other trading partners 

factors affecting net exports: trade barriers

• quotas/tarrifs

• increases in price of exports

• E and AD decrease

why may trade barriers not affect net exports?

• firms can find new trading partners

• global supply

factors affecting net exports: non-price factors 

• if goods are of high quality, exports increase, esp in times of growth

• international relations 

why may non price factors not affect net exports?

• regulated global standards in certain products

• basic commodities (water, oil) mainly depend on price