2.2.5 Net Trade (X-M)

Exchange rate (XR)

The price of one currency expressed in terms of another currency

There is no such thing as a strong or weak currency

• Only becomes stronger or weaker comparatively

When a currency has increased in value/ become stronger, it has appreciated or the external value has increased

A stronger pound is good for UK importers because the things you are buying abroad are (as far as the consumer is concerned) cheaper

A stronger pound is bad for UK exporters - makes it look expensive

Stronger does not always mean better

(X-M) = the value of exports and imports

= (Px x Qx) - (Pm x Qm)

Stronger pound

Px stays same, Qx goes down = decreases the value of exports

Pm decreases, Qm increase = depends on the elasticity of the product

S - stronger

P - pound

I - imports

C - cheaper

E - exports

E - expensiver

Stronger pound (X-M) = more negative number

The main influences on the net trade balance:

• Real income

  • If our incomes increase, we spend more on imports - X stays constant, M increases = smaller net trade = smaller AD

  • As incomes rise, AD increases

• Exchange rates

  • A strong pound = cheaper imports = buy more = M increases

  • A strong pound = expensive exports = X decreases

  • (X-M) decreases

• State of the world economy

  • If the rest of the world gets richer - AD should increase as a result

  • As more countries are able to buy Exports

• Degree of protectionism

  • Protectionism: the barriers that one country puts on another (e.g. tariffs)

  • Higher tariffs should reduce imports because it will be more expensive to bring in goods

  • However, it can cause higher price levels which is inflation

  • If you are tariffing, the other countries will also put them in place = cancels out - therefore exports will decrease

• Non-price factors

  • Trade is also affected by things like the quality of our products

    • e.g. British chicken > American chicken

  • Higher price can