Net Exports

    0
    17

    Exports are domestic goods and services sold to foreign agents. Imports are foreign goods and services bought by domestic agents. Net exports are exports minus imports (X-M).

    An increase (decrease) in net exports will increase (decrease) AD and shift AD right (left).

    Many factors could increase net exports:

    1) Exchange Rate.

    An exchange rate (XR) is the price of one currency in terms of another. A fall in the domestic country’s exchange rate means the domestic economy becomes more internationally price competitive, exports become cheaper and rise, imports become dearer and fall so AD rises.

    2) Rest of the World.

    Booms can spread from one country to another. A boom in country X means X’s income rises and their consumers demand more imports. Country Y exports to country X so Y’s exports rise and AD rises.

    3) Quality.

    If the quality of the domestic economy’s goods rises, foreign consumers will demand the domestic economy’s goods, exports rise and AD rises.

    4) Inflation.

    A fall in country X’s inflation makes X’s goods more internationally price competitive, exports are cheaper and rise, imports are dearer and fall so AD rises.

    5) Income.

    A fall in the domestic country’s income means consumers buy less luxury goods so imports fall and AD rises.

     

    LEAVE A REPLY

    Please enter your comment!
    Please enter your name here