What happens if net exports are negative

Why, then, does the aggregate demand curve slope downward? One reason for the downward slope of the aggregate demand curve lies in the relationship between real wealth the stocks, bonds, and other assets that people have accumulated and consumption one of the four components of aggregate demand.

When the price level falls, the real value of wealth increases—it packs more purchasing power. An increase in wealth will induce people to increase their consumption.

The consumption component of aggregate demand will thus be greater at lower price levels than at higher price levels. The tendency for a change in the price level to affect real wealth and thus alter consumption is called the wealth effect; it suggests a negative relationship between the price level and the real value of consumption spending. A second reason the aggregate demand curve slopes downward lies in the relationship between interest rates and investment.

A lower price level lowers the demand for money, because less money is required to buy a given quantity of goods. What economists mean by money demand will be explained in more detail in a later chapter. But, as we learned in studying demand and supply, a reduction in the demand for something, all other things unchanged, lowers its price. A lower price level thus reduces interest rates. Lower interest rates make borrowing by firms to build factories or buy equipment and other capital more attractive.

A lower interest rate means lower mortgage payments, which tends to increase investment in residential houses. Investment thus rises when the price level falls. The tendency for a change in the price level to affect the interest rate and thus to affect the quantity of investment demanded is called the interest rate effect. John Maynard Keynes, a British economist whose analysis of the Great Depression and what to do about it led to the birth of modern macroeconomics, emphasized this effect.

For this reason, the interest rate effect is sometimes called the Keynes effect. A third reason for the rise in the total quantity of goods and services demanded as the price level falls can be found in changes in the net export component of aggregate demand. All other things unchanged, a lower price level in an economy reduces the prices of its goods and services relative to foreign-produced goods and services.

The result is an increase in net exports. The international trade effect is the tendency for a change in the price level to affect net exports. Taken together, then, a fall in the price level means that the quantities of consumption, investment, and net export components of aggregate demand may all rise. Since government purchases are determined through a political process, we assume there is no causal link between the price level and the real volume of government purchases.

Therefore, this component of GDP does not contribute to the downward slope of the curve. In general, a change in the price level, with all other determinants of aggregate demand unchanged, causes a movement along the aggregate demand curve. A movement along an aggregate demand curve is a change in the aggregate quantity of goods and services demanded. A movement from point A to point B on the aggregate demand curve in Figure 7. Such a change is a response to a change in the price level.

Notice that the axes of the aggregate demand curve graph are drawn with a break near the origin to remind us that the plotted values reflect a relatively narrow range of changes in real GDP and the price level. We do not know what might happen if the price level or output for an entire economy approached zero. Such a phenomenon has never been observed.

Aggregate demand changes in response to a change in any of its components. An increase in the total quantity of consumer goods and services demanded at every price level, for example, would shift the aggregate demand curve to the right.

A change in the aggregate quantity of goods and services demanded at every price level is a change in aggregate demand , which shifts the aggregate demand curve. Increases and decreases in aggregate demand are shown in Figure 7. Changes in Aggregate Demand. An increase in consumption, investment, government purchases, or net exports shifts the aggregate demand curve AD1 to the right as shown in Panel a.

A reduction in one of the components of aggregate demand shifts the curve to the left, as shown in Panel b. What factors might cause the aggregate demand curve to shift? Each of the components of aggregate demand is a possible aggregate demand shifter.

We shall look at some of the events that can trigger changes in the components of aggregate demand and thus shift the aggregate demand curve. Several events could change the quantity of consumption at each price level and thus shift aggregate demand. One determinant of consumption is consumer confidence. If consumers expect good economic conditions and are optimistic about their economic prospects, they are more likely to buy major items such as cars or furniture.

The result would be an increase in the real value of consumption at each price level and an increase in aggregate demand. In the second half of the s, sustained economic growth and low unemployment fueled high expectations and consumer optimism. Surveys revealed consumer confidence to be very high. That consumer confidence translated into increased consumption and increased aggregate demand.

In contrast, a decrease in consumption would accompany diminished consumer expectations and a decrease in consumer confidence, as happened after the stock market crash of The same problem has plagued the economies of most Western nations in as declining consumer confidence has tended to reduce consumption.

Because no nation wants a negative trade balance, some countries try to protect their own markets. This policy, called logically enough protectionism , uses barriers to keep out imports. These barriers include high tariffs?

Despite some nations' attempts at protectionism, free trade? Economists usually favor free trade because it tends to give consumers the greatest choice of products at the lowest prices. That occurs because some nations are better at producing certain products than others. All rights reserved including the right of reproduction in whole or in part in any form.

To order this book direct from the publisher, visit the Penguin USA website or call You can also purchase this book at Amazon. The Economy? EconoTalk Protectionism refers to government policies designed to restrict imports from coming into the nation. Both are great and increase the wealth of a nation. Current account deficits and surpluses reflect differences in savings and investment. No, it is better for a country to maximize total trade, exports and imports.

Transfer payments include Social Security, Medicare, unemployment insurance, welfare programs, and subsidies. These are not included in GDP because they are not payments for goods or services, but rather means of allocating money to achieve social ends.

Each component of GDP is important. Imports offer American consumers greater choices, a wider range of quality, and access to lower-cost goods and services. Imports and exchange rate The other effect is that a rise in imports will , ceteris paribus, cause a depreciation in the exchange rate.

A depreciation in the exchange rate tends to increase inflationary pressure because: Imports become more expensive. Exports and AD increase causing demand-pull inflation. If a country imports more than it exports it runs a trade deficit. If it imports less than it exports, that creates a trade surplus. When a country has a trade deficit, it must borrow from other countries to pay for the extra imports.

First, exports boost economic output, as measured by gross domestic product. Imports , Exports , and GDP If exports exceed imports , the net exports figure would be positive, indicating that the nation has a trade surplus. If exports are less than imports , the net exports figure would be negative, indicating that the nation has a trade deficit. A trade surplus contributes to economic growth.

Imports — definition Imports are the value of foreign goods and services bought by a country's households, firms, government agencies, and other organisations in a given period of time. In terms of the flow of economic activity, import spending is a leakage or withdrawal out of the circular flow of income.

Net exports are a measure of a nation's total trade. The formula for net exports is a simple one: The value of a nation's total export goods and services minus the value of all the goods and services it imports equal its net exports.

A nation's net exports may also be called its balance of trade. The economy is measured by gross domestic product. That's the dollar value of everything produced in the last year. The most important indicator is GDP growth, which compares this quarter with the last. To calculate net exports , you simply add up all the goods and services that are exported to other countries from your home country and subtract all the goods and services that are imported from other countries into your country over a specific period of time, typically a year.

Net exports is the difference between the total value of exports and imports by a country.