Study Notes

Net Trade Balance and Aggregate Demand

Last updated 20 May 2017

The net trade balance is measured as the total value of exported goods and services minus the total value of imported products.

A trade surplus means that X>M – therefore aggregate demand (AD) will increase.

A trade deficit means that M>X – therefore AD will fall. There is a net leakage from the circular flow of income.

If X=M, then the trade balance is zero, external trade will have a neutral effect on AD.

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