1. Determinants of Net Exports

2. Income As national income rises, the nation buys more goods, increasing imports As national income rises, the nation buys more goods, increasing imports When foreign nations incomes rise, they buy more goods, increasing our exports When foreign nations incomes rise, they buy more goods, increasing our exports Real GDP Imports Real GDP Imports Foreign countrys real GDP our Exports Foreign countrys real GDP our Exports

3. Relative Prices Price rise in one country makes that countrys exports seem more expensive to other countries Price rise in one country makes that countrys exports seem more expensive to other countries Price rise must be relative: prices rise more than in other country Price rise must be relative: prices rise more than in other country PL Imports and Exports PL Imports and Exports Foreign PL Our Exports and Our Imports Foreign PL Our Exports and Our Imports

4. Exchange Rate Exchange rate affects the apparent prices of exports and imports Value of the $ Imports and Exports

5. Trade Policies Tariffs = protective taxes that increase cost of imports to protect domestic industry Tariffs make imports seem expensive Increased tariffs our Imports Imposing tariffs may cause other countries to impose tariffs, stifling international trade Subsidies encourage production and cheapen exports (but may be illegal under treaties)

6. Cultural Preferences and Technology Changes in trends, fashions, likes, dislikes, affect imports and exports (e.g., Coffee, Sugar, Coca Cola, movies, German cars) Changes in trends, fashions, likes, dislikes, affect imports and exports (e.g., Coffee, Sugar, Coca Cola, movies, German cars) Technology changes can drive import/export changes: Technology changes can drive import/export changes: car use Saudi Exports car use Saudi Exports World software use US Exports World software use US Exports

7. Net Exports and AD/SRAS One reason AD slopes downward is the Net Export effect: One reason AD slopes downward is the Net Export effect: PL Exports and Imports, so rGDP PL Exports and Imports, so rGDP Change in any determinant of net exports will shift AD curve Change in any determinant of net exports will shift AD curve If PL changes, use the curve (dont shift it) If PL changes, use the curve (dont shift it) If any other determinant changes, shift the curve If any other determinant changes, shift the curve Remember the multiplier effect Remember the multiplier effect

8. Net Exports, AD and Multiplier

9. Scenario 1 Japanese labor shortage increases prices throughout Japanese economy. Japanese labor shortage increases prices throughout Japanese economy. All else unchanged, what are the effects on All else unchanged, what are the effects on US imports US imports US exports US exports US GDP US GDP US price level US price level AD 1 AD 2 PL rGDP SRAS

10. Scenario 2 Japan unveils new fuel-efficient cars, such as the Toyota Prius. Japan unveils new fuel-efficient cars, such as the Toyota Prius. All else unchanged, what are the effects on All else unchanged, what are the effects on US imports US imports US exports US exports US GDP US GDP US price level US price level AD 2 AD 1 PL rGDP SRAS

11. Scenario 3 Politicians create massive protective tariffs, which cause foreign nations to create retaliatory tariffs. Politicians create massive protective tariffs, which cause foreign nations to create retaliatory tariffs. All else unchanged, what are the effects on All else unchanged, what are the effects on US imports US imports US exports US exports US GDP US GDP US price level US price level AD 2 AD 1 PL rGDP SRAS 1 Will exports be hurt more than imports? It Depends… ??? SRAS 2