Influences on net exports Demand in the UK (real income) As our economy grows and real incomes rise, consumers buy more of everything, including imports. So imports rise. Demand in the rest of the world If growth in other countries is high, their consumers and firms will be buying more of everything, including our exports. So exports will rise. Exchange rates If the £ Sterling rises in value, foreign goods are cheaper for UK citizens to buy. So imports will rise. UK goods will also be more expensive for foreigners to buy. So exports will fall. This has a double whammy effect on (X-M) with both factors working to pull net exports down.

Influence on net exports Non-price factors Some countries are known for high quality products or for being especially good at particular products. These may be sought after by foreigners, increasing exports. Eg. The UK is very strong in financial services; Germany is (was)good at cars. Protection A country may have restrictions on imports Tariffs are taxes on imports, so higher tariffs reduce imports Quotas are restrictions on the quantity of imports Inflation If our prices rise faster than prices in the rest of the world, our exports are less competitive and fall. Imports would be cheaper and so we would import more

Exchange rates Old exchange rate New exchange rate Which currency is stronger, which weaker % change £1 buys $1.50 $1.65 $1.35 €1 buys $1.20 $1.32 $1 buys 50 Rupees 55 Rupees $1 buys €0.80 €0.90

Marginal propensity to import MPM Income (Y) Tax (T) Saving (S) Imports (M) Domestic Cons -20 20 50 10 -10 40 100 60 150 30 80 200 250 120 300 70 130 What is the MPM between 0 and 250? Between 0 and 250 what proportion of the increase in income is not spent (withdrawn)? Household spending (C) is after taxes and saving Some of the consumption is on imports In fact in this case 10% of the increase in (gross) income is spent on imports Overall, 60% of the increase in income is not spent (withdrawn)