2.2.5 Net Trade (X - M)

Net trade is the value of exports minus the value of imports. For the UK, this is typically a negative number (a trade deficit).

A. Main Influences on the Net Trade Balance

  1. Real Income:

    • As UK real incomes rise, consumers buy more goods. A significant portion of these are imports (e.g., tech, cars). This leads to a worsening trade balance.

    • Evaluation: The impact depends on the Marginal Propensity to Import (MPM).

  2. Exchange Rates:

    • SPICED: Strong Pound, Imports Cheap, Exports Dear. A strong pound usually worsens the trade balance.

    • WPIEC: Weak Pound, Imports Expensive, Exports Cheap. A weak pound usually improves it.

    • Evaluation: The Marshall-Lerner Condition states a depreciation only improves the balance if the sum of the price elasticities of demand for exports and imports is greater than 1 ($PED_x + PED_m > 1$).

  3. State of the World Economy:

    • If our main trading partners (e.g., the EU or US) are in a recession, they buy fewer UK exports, even if our prices are low.

  4. Degree of Protectionism:

    • Tariffs or quotas imposed by other countries make UK exports more expensive and harder to sell.

  5. Non-Price Factors:

    • Quality, design, reliability, and after-sales service. Even if German cars are more expensive, people buy them for the perceived quality, keeping German exports high.