Net Exports and International Finance

Read this chapter to examine the reasons nations trade and the way net exports determinants influence aggregate demand and the equilibrium GDP and price level in a country. Also, learn about the balance of payments components and the way financial capital flows mirror the trade balance. The chaper also defines and compares various types of exchnage rate systems.

1. The International Sector: An Introduction

KEY TAKEAWAYS

  • International trade allows the world's resources to be allocated on the basis of comparative advantage and thus allows the production of a larger quantity of goods and services than would be available without trade.
  • Trade affects neither the economy's natural level of employment nor its real wage in the long run; those are determined by the demand for and the supply curve of labor.
  • Growth in international trade has outpaced growth in world output over the past five decades.
  • The chief determinants of net exports are domestic and foreign incomes, relative price levels, exchange rates, domestic and foreign trade policies, and preferences and technology.
  • A change in the price level causes a change in net exports that moves the economy along its aggregate demand curve. This is the international trade effect. A change in net exports produced by one of the other determinants of net exports will shift the aggregate demand curve by an amount equal to the initial change in net exports times the multiplier.