Chapter 24: Problem 10

If real GDP in the United States declined by more during the \(2007-\) 2009 recession than did real GDP in Canada, China, and other trading partners of the United States, would the effect be to increase or decrease U.S. net exports? Briefly explain.

Short Answer

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The effect of a greater real GDP decline in the U.S. compared to its trading partners would most likely be an increase in U.S. net exports. This is due to a potential decrease in imports (reduce the outflow) and an increase in exports (increase the inflow).

Step by step solution

Understanding the situation

The exercise presents a situation where the US had a bigger GDP decline than Canada, China, and other of its trading partners in the recession period between 2007 and 2009.

Analyzing the economy's reaction to recessions

In a recession, the country's demand for goods and services decreases. This includes not only household consumption but also investment from businesses. As a result, internal demand decreases.

Implications for exports

The decrease in internal demand could also lead to lower demand for imports, as people and businesses buy less from abroad. This decreases the value of imports, which is one component of net exports.

Implications for imports

As for exports, the decline in Real GDP could potentially lower the prices of goods and services in the country, making them more attractive to foreign consumers. If this happens, it can increase the value of exports, which is the other component of net exports.

Concluding the effect on Net Exports

Both an increase in the value of exports and a decrease in the value of imports would lead to an increase in net exports. Therefore, if real GDP in the US declined more than did real GDP in its trading partners during the recession, it would most likely increase U.S. net exports.