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October 17, 2017 

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LIMITED RESOURCES: Finite quantities of labor, capital, land, and entrepreneurship available to an economy for the production of goods and services. This is one half of the fundamental problem of scarcity that has plagued humanity since the beginning of time. The other half of the scarcity problem is unlimited wants and needs.

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NET EXPORTS:

The difference between exports--goods and services produced by the domestic economy and purchased by the foreign sector--and imports--goods and services produced by the foreign sector and purchased by the domestic economy. These are one of four aggregate expenditures on gross domestic product. The other three are consumption expenditures, investment expenditures, and government purchases.
Net exports are the difference between exports and imports. While exports and imports are important unto themselves, when combined into single measure, net exports capture the overall interaction between the foreign sector and the domestic economy.

Exports and Imports

Net exports are exports minus imports. Arithmetically speaking, if exports exceed imports, then net exports are positive, and if imports exceed exports, the net exports are negative.
  • Exports: Exports are goods and services produced by the domestic economy and purchased by the foreign sector. In other words, exports are goods sold to other countries. A few examples of exports can be seen in Shady Valley, especially those shipped to foreign countries for sale. OmniMotors has a substantial South American market for the XL GT 9000 Sports Coupe. The Quadra DG Computer Works sells a great number of computers to Northwest Queoldiolia. And Wacky Willy Stuffed Amigos are also quite popular throughout Asia.

    In addition to goods physically sold in other countries, exports also include goods and services purchased by foreign citizens within the confines of the domestic economy. A tourist from Northwest Queoldiolia who spends a day at the Shady Valley Amusement Park is responsible for an export. A German student who purchases educational services by virtue of enrollment at the Ambling Institute of Technology also contributes to total exports.


  • Imports: Imports are goods and services produced by the foreign sector and purchased by the domestic economy. In other words, imports are goods bought from other countries. Shady Valley also provides examples of imports. A trip to the MegaMart Food Emporium Super Center by Pollyanna Pumpernickel, a representative member of the household sector, is likely to end up with a number of imported commodities, including bananas and coffee from South America, chocolate from Germany, and cheese from Switzerland.

    The Shady Valley business sector purchases imported capital goods, including the sewing machines that The Wacky Willy Company imported from Canada, the taco steamers that Waldo's TexMex Taco World imported from Mexico, and the coaxial cable that the 4M cable television company imported from Finland. The government sector is also prone to import. The state-supported Ambling Institute of Technology, has several foreign citizens on the faculty. The Shady Valley city government imports paper parchment from China.

Business Cycles

Business cycles are the ups and downs of economic activity. The economy expands for several years, then it contracts for a year or two, then it expands again. Although net exports are a moderately small part of the macroeconomy, they can trigger business-cycle instability. Should net exports rise or fall, then the macroeconomy can experience business-cycle expansions or contractions.

Suppose, for example, that exports rise or imports fall, resulting in an increase in net exports. This net increase in the sales of production to the foreign sector results in more domestic production, more employment of domestic resources, and more domestic income. The result is a short-run business-cycle expansion.

However, should exports fall or imports rise, resulting in a decrease in net exports. This net decrease in the sales of production to the foreign sector results in less domestic production, less employment of domestic resources, and less domestic income. The result is a short-run business-cycle contraction.

The Circular Flow

The Circular Flow
Circular Flow
The role that net exports play in the macroeconomy can be illustrated by the circular flow model. The circular flow captures the continuous movement of production, consumption, income, and factor payments between producers and consumers.

A basic representation of the circular flow is displayed to the right. The components of this model are the four macroeconomic sectors--household, business, government and foreign--and the three macroeconomic markets--product, resource, and financial.

The household sector at the far left contains the consuming population of the economy. The business sector at the far right includes all of the producers. The government sector is positioned in the middle of the diagram and the foreign sector is at the very top.

The product markets near the top of the flow direct production from the business sector to the household sector in exchange for payment flowing in the opposite direction. The resource markets at the bottom of the flow direct factor services from the household sector to the business sector in exchange for payment flowing in the opposite direction. The financial markets located just above the resource markets divert saving from the household sector to business and government borrowing.

The circular flow indicates that the income used by the household sector to purchase goods through the product markets is obtained by selling factor services through the resource markets. It also indicates that the revenue used by the business sector to pay for factor services obtained through the resource markets is generated by selling goods through the product markets.

Net exports are the net payment flow from the foreign sector to the business sector in exchange for the net physical flow of goods and services from the business sector to the foreign sector. A positive net exports (exports greater than imports) ADDS to the total volume contained in the domestic flow. A negative net exports (exports less than imports) REDUCES the total volume contained in the domestic flow.

Determinants

Net exports can and do change from time to time. And when they change, they trigger instability. A few of the more important determinants that cause net export changes include:
  • Global economic prosperity is a big influence on net exports. When other nations are in fine, prosperous, expanding economic shape, their consumers tend to buy more goods, some of these goods are likely produced in the domestic economy. As such, exports to the foreign sector increase, which increases net exports.

  • Currency exchange rates are another key determinant of net exports. An exchange rate is the price of one nation's currency in terms of another. When exchange rates change, they affect the relative prices of exports and imports. As exchange rates change, exports change, imports change, and so too do net exports.

  • Trade policies, especially the assortment of trade barriers, tariffs, restrictions, and subsidies, that nations tend to impose on one another to gain a competitive trade advantage, also have a big effect on net exports. Greater restrictions on imports tend to increase net exports--at least in the short run. In the longer run, other nations tend to retaliate by imposing their own restrictions on the export side, which reduces net exports.

Three More Expenditures

Net exports are one of four expenditures on gross domestic product made by the four macroeconomic sectors--household, business, government, and foreign. The other three are consumption expenditures (household sector), investment expenditures (business sector), and government purchases (government sector). All together these four are termed aggregate expenditures.
  • Consumption Expenditures: Consumption expenditures are the expenditures by the household sector on final goods and services undertaken in a given time period. The official measure of consumption expenditures is termed personal consumption expenditures and is generally divided into three categories--durable goods, nondurable goods, and services. Consumption expenditures are the largest and most stable of the four expenditures. They are about 60 to 70 percent of aggregate expenditures. They play a critical role in the macroeconomy.

  • Investment Expenditures: Investment expenditures are the expenditures by the business sector on final goods and services (in particular, capital goods like factories and equipment) undertaken in a given time period. The official measure of investment expenditures is termed gross private domestic investment and is divided into three categories--nonresidential fixed investment, residential fixed investment, and changes in private inventories. Investment expenditures are the most volatile of the four expenditures. They are about 10 to 15 percent of aggregate expenditures. Investment is the primary source of business cycles.

  • Government Purchases: Government purchases are the expenditures by the government sector on final goods and services undertaken in a given time period. The official measure of government purchases is termed government consumption expenditures and gross investment, reflecting the fact that some government purchases are for consumption goods and some for capital investment. They are also about 10 to 15 percent of aggregate expenditures. Government purchases are a key fiscal policy for addressing business-cycle instability.
The total expenditures by the four sectors are typically summarized in the aggregate expenditures (AE) equation as the sum of consumption expenditures (C), investment expenditures (I), government purchases (G), and net exports (X - M).
AE = C + I + G + (X-M)

<= NET-EXPORT EFFECTNET EXPORTS DETERMINANTS =>


Recommended Citation:

NET EXPORTS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2017. [Accessed: October 17, 2017].


Check Out These Related Terms...

     | imports | exports | consumption | consumption expenditures | saving | investment | investment borrowing | government purchases | government borrowing |


Or For A Little Background...

     | foreign sector | macroeconomics |


And For Further Study...

     | circular flow | business cycles | economic goals | macroeconomic sectors | macroeconomic markets | macroeconomic problems | macroeconomic theories | unemployment | inflation |


Related Websites (Will Open in New Window)...

     | Bureau of Economic Analysis | World Trade Organization | U.S. International Trade Administration | NAFTA Secretariat |


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