A nation’s economy: Net exports

Summary

In this Learning Path, we learn the basic concepts needed to start studying any country’s economy. Even though the analysis should start by assuming either a closed or open economy, this LP omits such concepts, and gives just the very basic notions required to study macroeconomics.

The basics:

Measuring the production of an economy:

Net exports (also known as balance of trade or commercial balance), are one of the components of the gross domestic product. Net exports of a country are the difference between that country’s exports and imports of goods and services. Exports are defined as the merchandise produced domestically and sold in the rest of the world, whereas imports is merchandise produced overseas and sold domestically:

Net exports = exports – imports

An equivalent denomination for net exports is the trade balance, a term that allows us to determine situations of surplus, deficit or equilibrium in a country’s relations with the rest of the world. When exports are greater than imports, there is an excess of exports and we talk about a trade surplus. In contrast, when imports are greater than exports, the country is said to run a trade deficit. In the case that the country’s exports and imports are identical, net exports are zero, and the country has a balanced trade.

Some of the factors that influence the trade balance are: the tastes and incomes of domestic and foreign consumers, the prices of the products in the country and abroad, the exchange rates, the associated costs to trade (e.g. transport costs), government policies, or international agreements.

In this Learning Path we’ve learned a few basic, but very important concepts needed to analyse a nation’s economy. Starting with a definition of macroeconomics and the circular flow diagram, we’ve then learned what is the gross domestic product of a country. We’ve also learned about its four components: consumption, investment, government spending and net exports.

A nation’s economy: Government spending