Net Exports and AD Flashcards
(21 cards)
What is the formula for Aggregate Demand (AD)?
AD = C + I + G + (X - M)
What happens to AD if (X - M) increases?
AD shifts to the right (increase in net exports boosts total demand).
What can cause (X - M) to increase?
Higher exports or lower imports.
What happens to AD if (X - M) decreases?
AD shifts to the left (fall in net exports reduces demand).
How does a boom abroad affect UK exports?
Foreign consumers have more income → demand more UK exports → (X - M) rises → AD shifts right.
How does a recession abroad affect UK exports?
Lower foreign demand for UK goods → exports fall → (X - M) drops → AD shifts left.
What happens if real disposable income increases in the UK?
UK consumers import more → imports (M) rise → (X - M) falls → AD shifts left.
What does “marginal propensity to import” mean?
The fraction of extra income spent on imports.
What happens to AD during a domestic recession?
People import less → imports (M) fall → (X - M) increases → AD shifts right.
What does SPICED stand for?
Strong Pound Imports Cheap, Exports Dear.
What does WIDEC stand for?
Weak Impound (currency) Depreciates → Exports Cheap.
How does a strong exchange rate (SPICED) affect AD?
Imports cheap → more imports → M rises
Exports dear → fewer exports → X falls
(X - M) falls → AD shifts left
How does a weak exchange rate (WIDEC) affect AD?
Imports expensive → fewer imports → M falls
Exports cheap → more exports → X rises
(X - M) rises → AD shifts right
Why is a weak exchange rate generally good for AD?
It improves net exports (X - M) by making exports more competitive and reducing imports, boosting demand.
What is protectionism?
Economic policies like tariffs, quotas, or sanctions that restrict trade to protect domestic industries.
How does strong protectionism abroad affect UK exports?
Harder to sell UK goods overseas → exports (X) fall → (X - M) falls → AD shifts left.
How does strong protectionism at home (UK) affect imports?
Tariffs/quotas on imports → imports (M) fall → (X - M) rises → AD shifts right.
How does weak protectionism abroad benefit the UK?
Easier access to foreign markets → exports rise → export revenue increases → (X - M) increases → AD shifts right.
What happens if UK inflation is higher than other countries’?
UK goods are less competitive → exports fall, imports rise → (X - M) falls → AD shifts left.
What happens if UK inflation is lower than trading partners’?
UK exports become more competitive → export revenue increases → (X - M) rises → AD shifts right.
How does high relative inflation affect imports?
Foreign goods become cheaper → imports rise → M increases → (X - M) falls → AD shifts left.
