Chapter 29: The Foreign Sector
Relationship Between Exports and Imports
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A Trade Surplus is when exports exceeds imports. A Trade
Deficit exists when exports fall short of imports.
If a trade surplus exists, X – M is positive. With a trade deficit, X
– M is negative.
Canada usually has a trade surplus, but sometimes it has a
deficit.
Begger-thy-neighbour is a policy of trade protectionism that
restricts the flow of imports.
The Net Export Function
- The Net Export Function is downward sloping.
- When the Income line and the Net Exports (X-M) line intersect X
= M.
- A rise in exports move the entire net export line, while a change
in imports changes the slope of the net exports line.
A Change in Imports
- Marginal; Propensity to Import (MPM) is the fraction of extra income
that is spent on imported goods and services.
- MPM = (Change in Imports)
(Change in Income)
The Determinants of Net Exports
- The Amount of goods and services Canada is able to sell abroad
depends on:
o The prices of our goods relative to prices in other
countries.
o Foreigners’ incomes
o Foreigners’ tastes and preferences for Canadian goods and
services.
- The amount of goods that Canadians bur from abroad depends
on:
o The prices of those goods relative to Canadian prices.
o Income in Canada
o Canadians tastes and preferences for foreign goods.
Relative Prices
- Changes in relative prices affect net exports.
- The Exchange Rate is the value of one country’s currency in
terms of another’s.
- Changes in exchange rates affect the net export function.
- The relative rate of inflation affects the net export fuction.
Relative Income
- A rise in income in Canada will tend to increase imports, while a
fall in income will tend to reduce imports.
- A rise in incomes in foreign countries will increase the demand
for Canadian goods by foreigners, while lower incomes abroad
will reduce the demand for Canadian goods
- Changes in relative income affect the net export function.
Tastes and Preferences
- A change in tastes affects the net export function.
Net Exports and Aggregate Expenditure
The Effect of Net Exports
- If X – M > 0 then AE rises.
- If X – M < 0 then AE falls.
Effects of Changes in Net Exports
- An increase in net exports increases AE and equilibrium income.
Policy Implications
- The government can stimulate economic activity by lowering the
external value of the dollar. Canadians would find foreign goods
relatively more expensive and therefore reduce their purchases
of foreign goods. Foreigners would find Canadian goods
relatively less expensive and would therefore buy more.