Determinants Determinants of of

Net Exports Net Exports

IncomeIncome As national income As national income

rises, the nation buys rises, the nation buys more goods, increasing more goods, increasing importsimports

When foreign nations’ When foreign nations’ incomes rise, they buy incomes rise, they buy more goods, increasing more goods, increasing our exportsour exports

Real GDP ↑ → Imports Real GDP ↑ → Imports ↑↑

Foreign country’s real Foreign country’s real GDP ↑ → our Exports ↑GDP ↑ → our Exports ↑

Relative PricesRelative Prices Price rise in one country Price rise in one country

makes that country’s makes that country’s exports seem more exports seem more expensive to other countriesexpensive to other countries

Price rise must be relative: Price rise must be relative: prices rise more than in prices rise more than in other countryother country

PL↑ → Imports ↑ and PL↑ → Imports ↑ and Exports ↓Exports ↓

Foreign PL↑ → Our Exports Foreign PL↑ → Our Exports ↑ and Our Imports ↓↑ and Our Imports ↓

Exchange RateExchange Rate

Exchange rate Exchange rate affects the affects the apparent prices of apparent prices of exports and exports and imports imports

Value of the $ ↑ → Value of the $ ↑ → Imports ↑ and Imports ↑ and Exports ↓Exports ↓

Trade PoliciesTrade Policies Tariffs = protective taxes that Tariffs = protective taxes that

increase cost of imports to increase cost of imports to “protect” domestic industry“protect” domestic industry

Tariffs make imports seem Tariffs make imports seem expensiveexpensive

Increased tariffs → our Imports Increased tariffs → our Imports ↓↓

Imposing tariffs may cause Imposing tariffs may cause other countries to impose tariffs, other countries to impose tariffs, stifling international tradestifling international trade

Subsidies encourage production Subsidies encourage production and cheapen exports (but may and cheapen exports (but may be illegal under treaties)be illegal under treaties)

Cultural Preferences and Cultural Preferences and TechnologyTechnology

Changes in trends, Changes in trends, fashions, likes, dislikes, fashions, likes, dislikes, affect imports and affect imports and exports (e.g., Coffee, exports (e.g., Coffee, Sugar, Coca Cola, movies, Sugar, Coca Cola, movies, German cars)German cars)

Technology changes can Technology changes can drive import/export drive import/export changes: changes: car use ↑ → Saudi Exports car use ↑ → Saudi Exports

↑↑ World software use↑ → US World software use↑ → US

Exports ↑Exports ↑

Net Exports and AD/SRASNet Exports and AD/SRAS

One reason AD slopes downward is the One reason AD slopes downward is the Net Export effect:Net Export effect: PL ↑→Exports↓ and Imports↑, so rGDP↓PL ↑→Exports↓ and Imports↑, so rGDP↓

Change in any determinant of net Change in any determinant of net exports will shift AD curveexports will shift AD curve If PL changes, use the curve (don’t shift it)If PL changes, use the curve (don’t shift it) If any other determinant changes, shift If any other determinant changes, shift

the curvethe curve Remember the multiplier effectRemember the multiplier effect

Net Exports, AD and Net Exports, AD and MultiplierMultiplier

Scenario 1Scenario 1

Japanese labor Japanese labor shortage increases shortage increases prices throughout prices throughout Japanese economy.Japanese economy.

All else unchanged, All else unchanged, what are the effects what are the effects onon US importsUS imports US exportsUS exports US GDPUS GDP US price level US price level

AD1AD2

PL

rGDP

SRAS

Scenario 2Scenario 2

Japan unveils new Japan unveils new fuel-efficient cars, fuel-efficient cars, such as the Toyota such as the Toyota Prius.Prius.

All else unchanged, All else unchanged, what are the effects what are the effects onon US importsUS imports US exportsUS exports US GDPUS GDP US price level US price level

AD2AD1

PL

rGDP

SRAS

Scenario 3Scenario 3 Politicians create Politicians create

massive protective massive protective tariffs, which cause tariffs, which cause foreign nations to foreign nations to create retaliatory create retaliatory tariffs.tariffs.

All else unchanged, All else unchanged, what are the effects onwhat are the effects on US importsUS imports US exportsUS exports US GDPUS GDP US price level US price level

AD2AD1

PL

rGDP

SRAS1

Will exports be hurt more than imports? It Depends…

???

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SRAS2