What are Net Exports?
Definition: Net Export is a financial metric that measures a country’s net economic trade with other countries. In its purest form, it is the difference between the value of goods exported and imported. Depending on whether a country imports or exports more, the value can be positive or negative.
Net Export Formula Calculation
A nation is said to have a trade surplus when the value of total exports exceeds the value of net imports, leading to a positive balance of trade. Similarly, a higher amount of total imports relative to total exports results in a trade deficit. Consequently, net export is an important variable for the calculation of a nation’s gross domestic product.
Net Exports = Total Exports – Total Imports
The calculation of the net export also helps in the determination of the financial health of a country. For instance, when the value of exports is higher than the imports, then it means the country is earning more money from foreign trade.
The inflow of more money from exports goes a long way in strengthening the financial status of any country. Likewise, the additional cash can go a long way in facilitating the purchase of different goods and services from other countries.
Similarly, if a country has a consistent trade deficit, meaning there are more imports than exports, then the same could pose significant challenges. Economists argue that high levels of trade deficit hurt the economy in one way or another. long term trade deficit can lead to a loss of jobs as demand for a country’s goods falls, given the increased importation as opposed to in-house manufacturing.
Central banks are, most of the time, forced to devalue a country’s currency in a bid to make imports expensive and exports cheaper.
Factors that Affect Net Exports
One of the factors that affect or influence net exports is the exchange rate. Assuming that Canada exports goods and services to the United States at an exchange rate of 1 Canadian dollar per 1.20 USD, any fluctuations on the exchange rate would influence net exports.
For instance, a depreciation of the exchange rate to 1.15 USD would necessarily make imports from the United States quite expensive, as the Canadian dollar is weaker relative to the U.S Dollar. Similarly, an appreciation of the exchange rate to $1.30 would essentially allow Canadian exporters to generate more money on all goods and services sold to U.S customers.
A weak currency consequently goes a long way in boosting exports by making a nation’s goods and services to appear cheaper as the importing country will have to pay a lower amount. Conversely, a strong currency makes a country’s exports to be expensive and uncompetitive.
Likewise, the amount of goods and services that a country exports and imports depend on the abundance of natural resources. Saudi Arabia and other Middle Eastern countries earn vast sums of money on exporting oil, given their massive oil reserves. Similarly, the countries tend to enjoy a positive trade balance with most countries around the world.
Net Export Example
If a country exports $300 billion worth of goods and imports $275 billion worth of goods and service, then the net export, in this case, would be:
Net Export = $300 billion- $275 billion = $25 billion
Given that the resultant net export figure is positive, it is added to a country’s’ GDP
Likewise, if a country’s export is $275 billion and imports $300 billion, then the resultant net export would be
Net Export = $275 billion- $300 billion = -$25 billion
Given that the resultant net export figure is negative, it is subtracted from the overall GDP
Summary
Net export is simply the difference between the amount of products shipped out of a country and the amount of products shipped in. The calculation of net exports helps in the determination of the financial health of a country. A country with a trade surplus is considered financially stable as it shows strength in generating money from other countries.