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Chapter 23: Problem 5

What are the three main determinants of net exports? How would an increase in the growth rate of GDP in the BRIC nations (Brazil, Russia, India, and China) affect U.S. net exports?

Short Answer

Expert verified
The three main determinants of net exports are domestic income, foreign income, and the real exchange rate. An increase in the growth rate of GDP in the BRIC nations would likely increase their demand for goods and services, including those imported from the U.S., potentially leading to an increase in U.S. net exports. However, economic situations can be influenced by many other factors and may not always lead to such straightforward results.

Step by step solution

01

Understanding the determinants of net exports

Net exports, the difference between a country's total value of exports and its total value of imports, are determined by three main factors: domestic income, foreign income, and real exchange rates. Domestic income influences how much the domestic country consumes, including imports. Foreign income affects the buying power of foreign countries and their consumption of the domestic country's exports. Real exchange rates affect the price of domestic goods relative to foreign goods, thus impacting imports and exports.
02

Interpreting the effect of GDP growth on net exports

Gross Domestic Product (GDP) is a measure of economic activity within a country. An increase in the growth rate of GDP implies an increase in the income of the citizens of that country. Therefore, a growth in GDP of the BRIC nations means that the people in these countries would have more income to spend, leading to an increased consumption, including the consumption of imported goods.
03

Explaining how an increase in GDP growth in BRIC nations affects U.S. net exports

As the income of the BRIC nations increases due to GDP growth, their demand for goods and services, including imports, would increase. Since the U.S. is a major exporter to these countries, this increased demand would lead to an increase in U.S. exports. An increase in U.S. exports without a corresponding increase in imports would lead to an increase in U.S. net exports. However, this is a simplified explanation and actual economic situations may be influenced by several other factors and may not lead to such linear results.

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Most popular questions from this chapter

What are inventories? What usually happens to inventories at the beginning of a recession? At the beginning of an expansion?

According to an article in the Wall Street Journal, in late 2014, the Japanese economy experienced a large increase in business inventories. The article noted, "The large buildup of inventories is a reflection that the \(\ldots\) drop in demand was bigger than expected." Does it matter that Japanese firms didn't expect the drop in demand? Won't a decline in demand always lead to an increase in firms' holdings of inventories? Briefly explain.

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