The net exports formula measures a country's balance of trade: Is it importing more goods than it sells other countries or the reverse? Macroeconomics, which focuses on big-picture economic issues, such as interest rates and gross national product, uses balance of trade as one measure of a country's economic strength.
The net export formula subtracts total imports from total exports to get net exports. If net exports is a positive figure, the country runs a trade surplus. If net exports is negative, then it's a trade deficit. If they're equal, there's a trade balance.
Economics is notorious for mind-numbingly complicated formulas, but the net exports formula is simple. Take a country's total exports of goods and services, subtract the total imports, and you get the net exports.
Say a small rural nation with an excellent climate for farming exports $24 billion worth of crops and fruit this year. Because it has no native tech sector, it imports $45 billion in televisions, computer equipment and other devices. The net exports total negative $21 billion, creating a trade deficit.
For real-world net exports examples, look at a couple of European nations. In 2017, the United Kingdom exported $395 billion in goods and services and imported $617 billion, giving it a trade deficit of $222 billion. In the same year, Germany exported $1.33 trillion and imported $1.08 trillion, giving the nation a trade surplus of $251 billion.
Economists don't stop at figuring whether a nation has a trade deficit or a surplus. They go on to use the net exports formula to derive the net export function in macroeconomics.
The net export function is a graph that uses net exports as one axis and national income as another. Suppose that as national income goes up, people buy more imports, but the volume of exports stays the same. The graph shows the value of net exports shrinking as national income rises.
Economists also use the graph to analyze factors causing a shift in net export function.
- If, for example, the exchange rate between the U.S. and Canadian dollars changes, so does the value of exports and imports. That can affect whether people buy local or buy from the other country.
- The U.S. imposing tariffs can discourage Americans from buying imports, shifting the net export function. If other countries impose tariffs of their own in retaliation, that could reduce exports and shift the function again.
- Tastes change. A hot new product may create a demand, exports boom, and net exports become larger.
- If transportation costs go up due to an oil embargo, for example, that can raise prices on imports and exports. That's yet another of the factors potentially causing a shift in export function.
If the net exports formula shows a trade deficit, governments sometimes take that as a bad sign. Their citizens are spending money, but it's largely going to businesses in other countries. Economists are divided on whether a trade deficit is a serious problem and what to do if it is.
Anti-deficit economists argue that if the U.S. runs a trade deficit, it's a sign Americans aren't saving or investing enough money. It's also a sign that some foreign countries may be using unfair practices such as suppressing wages or subsidizing exports while blocking American imports. If people buy imports instead of American products, that costs American businesses and American jobs.
The counter arguments include that if Americans have enough money to buy imports, that's a sign the American economy is in good shape. On top of which, the American government sometimes focuses solely on goods in calculating the net exports formula: America runs a surplus in exports of services. These economists argue that trying to change the trade balance without increasing American saving and investment would be a futile effort.