2.2.5 - Net trade (X-M)

Question 1

What is an import?

Answer 1

This is when a country buys products from another country.

Question 2

What is an export?

Answer 2

This is when a country sells a product they own to another country.

Question 3

What is the formula for AD?

Answer 3

C + I + G + (X - M)

Question 4

Draw or describe an AD curve

Answer 4

• X axis labelled as “Price Level”
• Y axis labelled as “Real GDP”
• P1 and Y1 labelled where AD meets their axis
• The AD line sloped downwards like demand on a S&D curve

Question 5

What does SPICED stand for?

Answer 5

Strong
Pound
Imports
Cheaper
Exports
Dearer

Question 6

What does WPIDEC stand for?

Answer 6

Weak
Pound
Imports
Dearer
Exports
Cheaper

Question 7

What is real income?

Answer 7

Real incomes measure the amount of disposable income available to consumers

Question 8

How does real income affect imports?

Answer 8

As consumers’ real income increases demand for goods and services rises.

This will lead to increased demand for imports dependent on the marginal propensity to import the amount of additional income that households spend on imports.

Question 9

How do exchange rates impact net trade?

Answer 9

• A strengthening currency will make UK exports less competitive.
• Demand may fall
• A stronger currency will also make imports more attractive to UK consumers and they may increase
• Net exports will therefore worsen
• A weaker currency should have the opposite effect and improve net exports

Question 10

How does a change in the global economy affect net trade?

Answer 10

• As global demand changes so will imports and exports
• A strong economy will import goods and services in
  order to meet its needs
• This might lead to an increase in domestic consumption
• If an economy increases its productive capacity by utilizing the factors of production this will allow it to increase supply to the rest of the world

Question 11

What is economic growth?

Answer 11

Economic growth is defined as the increase in the real value of goods and services produced as measured by the annual percentage change in real Gross Domestic Product (GDP). Economic growth is also defined as a long-run increase in a country’s productive capacity / potential national output.q

Question 12

Name 2 factors that will increase exports?

Answer 12

• Real GDP of other countries increases
• Changes in taste and fashion lead to interest in products
• Price inelastic exports are likely to see a fall in volume sales but an increase in total revenue
• Productive capacity increases allowing for greater sales of a product
• Product differentiation leads to greater demand for products

Question 13

What is a tariff?

Answer 13

Tariffs are a tax or duty to be paid on a particular product that is imported or exported.

Question 14

What is the definition of GDP?

Answer 14

The value of goods and services produced in the economy over a period of time.

Question 15

Name 2 of the main factors that affect net traed

Answer 15

• Real Income
• Exchange rates
• State of the world economy
• Degree of protectionism
• Non-price factors

Question 16

What’s a commodity?

Answer 16

A good that is common.

Question 17

What is protectionism?

Answer 17

The rules and regulations put in place to protect the domestic economy from foreign competition. Import taxes, subsidies to domestic firms and quotes are all examples of protectionism.