Net trade (X-M)

Overview

Recall questions on real income at home and abroad, the exchange rate, protectionism and competitiveness as influences on net trade.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   How is net trade calculated?

   Model answer

   Net trade is calculated as exports minus imports (X-M).

2. 2

   What does net trade represent for an economy?

   Model answer

   Net trade represents the trade balance of an economy.

3. 3

   Explain how higher domestic real income affects the trade balance.

   Model answer

   Higher domestic real income increases demand for imports, which worsens the trade balance as more spending flows abroad.

4. 4

   How does higher real income in foreign countries affect a nation's trade balance?

   Model answer

   Higher foreign real income increases demand for the country's exports, improving the trade balance.

5. 5

   If a country experiences rapid economic growth while its trading partners remain stagnant, what would you expect to happen to its trade balance?

   Model answer

   The trade balance would likely worsen because higher domestic income increases import demand while stagnant foreign income limits export growth.

6. 6

   How does currency depreciation affect import prices in domestic currency?

   Model answer

   Depreciation raises import prices in domestic currency, making imports more expensive for domestic consumers.

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