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Chapter 29: Problem 2

What is the difference between net exports and the current account balance?

Short Answer

Expert verified
Net exports only measure trade in goods and services, while the current account balance additionally includes income from abroad and current transfers.

Step by step solution

01

Define Net Exports

Net exports refer to the difference between the value of a country's exports and the value of its imports. If a country exports more than it imports, it has a trade surplus and net exports are positive. If a country imports more than it exports, it has a trade deficit and net exports are negative.
02

Define Current Account Balance

The current account balance is a broader measure. It includes not only the trade balance (net exports), but also income from abroad (like interest and dividends) and current transfers, such as foreign aid and remittances.
03

Explain the Difference

The difference between net exports and current account balance lies in these details. While net exports only refer to trade in goods and services, the current account also includes income from abroad and current transfers. Therefore, the current account gives a more comprehensive picture of a nation's economic interactions with the rest of the world.

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Most popular questions from this chapter

Suppose the federal government increases spending without also increasing taxes. In the short run, how will this action affect real GDP and the price level in a closed economy? How will the effects of this action differ in an open economy?

What are the three main sets of factors that cause the supply and demand curves in the foreign exchange market to shift?

The late economist Herbert Stein described the accounts that comprise a country's balance of payments: A country is more likely to have a deficit in its current account the higher its price level, the higher its gross [domestic] product, the higher its interest rates, the lower its barriers to imports, and the more attractive its investment opportunities - all compared with conditions in other countries-and the higher its exchange rate. The effects of a change in one of these factors on the current account balance cannot be predicted without considering the effect on the other causal factors. a. Briefly describe the transactions included in a country's current account. b. Briefly explain why, compared to other countries, a country is more likely to have a deficit in its current account, holding other factors constant, if it has each of the following. i. A higher price level ii. An increase in interest rates iii. Lower barriers to imports iv. More attractive investment opportunities

Why is the United States sometimes called the "world's largest debtor"?

Writing in the New York Times, Simon Johnson, an economist at MIT, made the argument that people outside the United States may at some point decide to "save less (in which case they may hold onto their existing United States government debt but not want to buy so much of new issues)." What does saving by people outside the United States have to do with sales of U.S. government debt? Does the level of domestic investment occurring in foreign countries matter for your answer? Briefly explain.
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