Balance of Trade
Main Concept
In the field of economics, exports are products which are produced domestically and sold to foreign nations, while imports are products which are produced abroad and sold domestically.
A nation's balance of trade, also known as its net exports (NX), is the difference between the value of its total exports (X) and that of its total imports (M). So, NX = X − M.
Modeling Imports and Exports
In the basic Keynesian macroeconomic model, we consider the value of total exports (X) to be an exogenous variable, meaning it does not vary with the level of disposable income I (real GDP less taxes [Y - T]), and is instead determined by external factors such as foreign exchange rates and barriers to trade. This is why total exports appears as a horizontal line in the "International Trade" graph below. The level of total imports (M), however, is assumed to be an endogenous variable and so it does vary with the level of disposable income (Y - T). The reasoning behind this assumption is that as income rises, consumers will spend more, both on domestic products and imported products. The degree to which a change in disposable income causes a change in total imports is determined by the marginal propensity to import (MPM). So, we can write total imports as the following function: M=MPMY−T.
The Balance of Trade graph shows the net exports (NX) function itself, which can be fully expressed as NX=X−MPM Y−T.
A nation is said to have balanced trade when total exports exactly equal total imports X = M, which implies that NX = 0.
A nation is said to have a trade deficit when total imports exceed total exports, so X < M, which implies that NX < 0.
A nation is said to have a trade surplus when total exports exceed total imports, so X > M, which implies that NX > 0.
The following graphs show a simple set of total exports, total imports, and net exports functions. Use the sliders to adjust the levels of exports and imports, then mark the check boxes to see where balanced trade, a trade surplus, or a trade deficit occurs.
Exports (X)
Marginal Propensity to Import (MPM)
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