The net exports or foreign demand of a country is the net demand of foreigners (non-residents) for goods and services produced in the country. That is, the sales of goods and services made by a country abroad discounted purchases or imports made of goods and services from the rest of the world.
Net exports are determined by the difference between exports (X) and imports (M) and are often referred to as net exports. This is the same as the difference between the expense that foreigners make for local products less the expense that residents make for products produced abroad.
Net exports are also the result of the balance of the balance of goods and services , forming part of the national accounts of a country and, in turn, of its gross domestic product . The formula for calculating the GDP of a country is as follows:
GDP = C + I + G +/- (X – M)
C = Private consumption I = Private investment G = Public expenditure
(X – M) = Balance of the Balance of goods and services
Although they are often used as synonyms, do not confuse external demand , which is the amount of goods and services that are produced in a country and that are demanded by residents abroad.
Factors that influence net exports
There are several factors that can affect the foreign demand of a country, here are some of them:
- Foreign demand is affected by changes in the exchange rate, that is, in the relative value of the local currency with respect to the currency of other countries. The weaker the local currency, the lower the demand for goods and services produced abroad.
- Commercial treaties and online commerce favor the growth of demand for foreign products.
- Subsidies and other aid that favor the country’s exports.
- Import limitations, tariff barriers and other restrictions reduce the growth of imports.
Determinants of exports in a country
There are different variables that affect the balance of the current account balance:
- Increase in foreign income, maintaining everything else is constant, improves the balance of national goods and services, since increasing foreign income increases the overall consumption of goods and services, both foreign and national. Therefore it raises the aggregate demand of the country.
- Depreciation of the local currency, increases the balance of goods and services because the prices of domestic products abroad are cheaper and therefore, aggregate demand rises.
- Increase in the income of the country, increases spending on national consumption, both domestic and foreign products. What raises imports and therefore reduces the balance of goods and services.
Case of a closed economy
In a closed economy, foreign demand is zero. There are no exports or imports. All production is sold internally so that the following equality is met:
Aggregate demand for goods produced in the country (DA) = Internal demand (DI)
It is also true that: DA = C + I + G = DI
C = Household consumption
I = Investment
G = Government spending
Case of an open economy
When the country opens its borders there is both internal and external demand. Goods produced in the country are sold not only to residents of the country (local sales) but also to residents abroad (through exports).
In addition, local consumers can demand goods from other countries through imports.
Considering the above, the economy will comply with the following equality:
DA = Internal demand (DI) + External demand (DE)
DA = C + I + G + X – M
X = exports
M = imports
Example of net exports
Suppose a country exports a volume of 100,000 million euros to the rest of the world and makes purchases to the rest of the world worth 50,000 million euros. We calculate the balance of the balance by checking account:
Net exports = X – M = 100,000 – 50,000 = 50,000 Million euros.
The country has a trade surplus since it sells more than it buys and, therefore, enters more than it spends. This situation is very positive for a country.