Also known as the net trade balance is the difference in value between a country’s exports of goods and services and its imports: Net Exports = Exports – Imports.
It includes exports of goods and services. It is an important component of AD. Exports make up around a quarter of AD.
The demand abroad for British exports, and the demand in Britain for imports depends on a number of factors:
- __The level of real income __–Imports will tend to increase with real GDP and vice versa. When incomes are rising, spending of all kins tends to increase, an some of this will be on imports. In the U.K. roughly £1 out of every £4 of spending goes on imports
- __The state of the world economy __– U.K. exports will increase when the global economy is growing and vice versa, for the reason as above; U.K. exports depend on the level of income amongst our trading partners, paricularly the E.U., which takes over 40% of our exports
- Price_ – _Many goods compete mainly on price, especially commodities and low value manufactured goods, such as cheap clothing. This has resulted in a decline in exports of these goods from igh wage economies, like Britain. Instead we now import most of our textiles from countries like China
- __The exchange rate __– refers to the price of one currency in terms of another. For instance, if £1 = $1.50, this is another way of saying that the dollar costs £0.67. A fall in the exchange rate means British goods become cheaper abroad and imports into Britain become more expensive. This should lead to an increase in exports, which are now more competitive, and a fall in imports. A rise in the exchange rate will have the opposite effect
- Degree of protectionism __– All countries restrict imports to some extent, either through __tariffs __(taxes on imports), __quotas __(a physical limit on the quantity) or through other regulations such as product standards or environmental controls. These are all called __trade barriers_. _At the present time the U.K. has barrier free access to the markets of the E.U., and the other members enjoy the same access to our market. It is possible that leaving the E.U. may result in the re-introduction of trade barriers between the U.K. and the E.U., so that exports and imports to and from Europe may fall
- Non-price factors – in contrast to commodities (like oil or wheat) and low value manufactured goods, exports of high tech goods and many services depend on quality, design, reputation and after sales service. The U.K. now depends largely on these kinds of goods and services for its exports. Examples include pharmaceuticals, defence equipment, healthcare and legal services