Net trade

What are exports and why are they important to the UK economy?

Exporting is the act of selling goods and services to another country.

Income from exports (X) counts as an injection on the circular flow of income and increases aggregate demand (AD)

What are imports and why are they important to the UK economy?

Importing is the act of buying goods and services from another country

Money spent on imports (M) counts as a leakage from the circular flow of income and reduces aggregate demand (AD)

What is a trade balance?

The trade balance is the difference between the value of exports and imports

What is the difference between a trade surplus and a trade deficit?

A trade surplus occurs when a country's exports exceed its imports, leading to a positive balance of trade. Conversely, a trade deficit occurs when a country's imports are greater than its exports, resulting in a negative balance

 

When the value of exports is greater than the value of imports, the trade balance is in surplus. This leads to an increase in AD

When the value of imports is greater than the value of exports, the trade balance is in deficit. This leads to a reduction in AD

Does the UK economy run a trade deficit or a trade surplus?

Trade deficit

What does this mean for UK Aggregate Demand (AD)?

More imports than exports therefore AD will decrease.

factors that affect the UK’s trade balance

Uk real income increases

Real income increases abroad

World economy booms

World economy slows

Uk£ appreciates

World economy slows

Protectionism increases

what are these effects on exports and imports

Uk real income increases

Real income increases abroad

World economy booms

World economy slows

Uk£ appreciates

World economy slows

Protectionism increases

 

Change in factors	Effect on Exports	Effect on Imports	(X–M)
UK real income increases	exports decrease	imports increase	trade balance weakens
Real income increases abroad	exports increase	imports decrease	trade balance strengthens
UK £ appreciates	Exports more expensive; exports   decrease	Imports increase	Trade balance weakens
UK £ depreciates	Exports less expensive; exports   increase	Imports decrease	Trade balance strengthens
World economy booms	exports less expensive	imports decrease	trade balance strengthens
World economy slows	exports more expensive	imports increase	trade balance weakens
Protectionism increases	Depends on retaliation measures	Imports more expensive; demand   decreases	Trade balance strengthens
Protectionism decreases	Likely to increase	Imports less expensive; demand   increases	Trade balance weakens

Exchange rates

A stronger currency (£) mean makes UK exports more expensive abroad and imports cheaper domestically → likely worsens the trade balance.

 A weaker currency (£) means Makes UK exports cheaper and imports more expensive → likely improves the trade balance, assuming demand is price elastic.

actors Influencing Net Trade (X-M)

Real income

Exchange rates

State of world economy

protectionism