1. 1 Variable Net Exports Chapter 24 Appendix © 2006 Thomson/South-Western

2. 2 Net Exports and Income  The amount of U.S. output purchased by foreigners depends not on the U.S. level of income but on income levels in their own countries

3. 3 Exhibit 12: Imports, Exports, Net Exports (a)  Autonomous export function is shown in panel (a)

4. 4 Exhibit 12: Imports, Exports, Net Exports  Imports are positively related to income, as shown in panel (b).

5. 5 Exhibit 12: Imports, Exports, Net Exports  Net exports are negatively related to income, as shown in panel (c). Net exports are zero when disposable income is $9.0 trillion.

6. 6 Exhibit 12: Imports, Exports, Net Exports  When disposable income increases, U.S. consumers spend more on all goods and services, including imported goods and services: the relationship between imports and income is positive as shown by the upward sloping import function, M, in the middle panel  What matters in terms of total spending on U.S. products are exports, X, minus imports, M, or net exports  By subtracting the import function in the middle panel from the export function in the top panel, we derive the net export function, depicted as X – M in the bottom panel (a)

7. 7 Exhibit 13: Shifts in Net Exports X – M Real disposable income (trillions of dollars) 0.9 - 0.9 0 X' – M' X" – M" 3.0 9.0 15.0  If the value of the dollar increases relative to foreign currencies, foreign products become cheaper for Americans and U.S. products become more expensive for foreigners.  This implies that imports increase at every level of income so net export function shifts from X – M down to X' – M‘  A decline in the dollar’s value will have the opposite effect, increasing exports and decreasing imports  upward shift of the net export function from X – M to X” – M” Real net exports (trillions of dollars)