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Net trade and aggregate demand

Say what moves exports and imports, and how net trade shifts AD

Specification: AQA 4.2.2.3 Edexcel 2.2.5

Exports add to UK aggregate demand and imports are taken away from it

Exports are goods and services made in the UK and sold abroad; imports are made abroad and bought in the UK. Aggregate demand counts spending on UK output, so exports add to it and imports are taken back out, leaving X − M. When X − M falls at every price level, the whole AD curve shifts left; when it rises, AD shifts right.

A fall in net trade shifts aggregate demandVertical axis: Price level. Horizontal axis: Real GDP. AD0: a downward-sloping line. AD1: a downward-sloping line.AD0AD1
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BeforeUK spending at each price level, with exports and imports at their old values, gives AD0.

Net trade is one part of AD. A fall in it at every price level moves the whole curve left; a rise moves it right.

Incomes at home drive imports, and incomes abroad drive exports

The amount of income in the UK directly affects how much it imports: more income brings more imports. When UK real incomes rise, households buy more of everything, including German cars and Spanish holidays.

Exports depend on incomes in the countries that buy them. If the euro area or the United States goes into recession, orders for UK cars, whisky and financial services fall. Faster growth abroad lifts UK exports.