- The net trade balance is the difference between the value of the exports and imports (X-M)
- The net trade balance is influenced by changes to real income, exchange rates, state of the world economy, and the degree of protectionism
A Table Showing How Changes to Each of the Influencing Factors Effects Exports & Imports
|Change in Condition||Effect on Exports||Effect on Imports||(X-M)|
|UK real income increases||Little effect||Consumers purchase more||Trade balance weakens|
|Real income increases abroad||Foreigners purchase more UK products - exports increase||Little effect||Trade balance strengthens|
|UK £ appreciates||Exports more expensive for foreigners - exports decrease||Consumers' money goes further abroad - imports increase||Trade balance weakens|
|UK £ depreciates||Exports less expensive for foreigners - exports increase||Consumers' money is worth less abroad - imports decrease||Trade balance strengthens|
|World economy booms||Increased demand for UK exports||Little effect||Trade balance strengthens|
|World economy slows||Decreased demand for UK exports||Little effect||Trade balance weakens|
|Protectionism increases||Depends on retaliation measures from other countries||Decreased demand for imports as they are more expensive||Trade balance strengthens|
|Protectionism decreases||Likely to increase||Increased demand for imports as they are less expensive||Trade balance weakens|
When evaluating the extent to which the trade balance strengthens or weakens as a result of exchange rate changes, remember that it is dependent on the price elasticity of demand (PED) of the exports and imports.
This is explained by the Marshall Lerner Condition and the J Curve.
The Marshall-Lerner Condition states that the depreciation/devaluation of a country's currency will lead to an improvement in its net trade balance only if the sum of the price elasticities of its exports and imports is greater than one
The J Curve argues that a net trade balance will worsen in the short term after a currency devaluation, but then improve in the medium to longer term.