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Relationship Between National Income and Net Exports
Using the components of the net exports function (Net Exports = X - mY), explain why a country's trade balance typically worsens as its national income rises, assuming the value of its exports remains constant.
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Consider an economy where the total value of goods and services sold to other countries remains fixed. If this economy experiences a significant increase in its overall income, what is the direct and most likely effect on its trade balance (the value of its exports minus the value of its imports)?
Calculating a Country's Trade Balance
Relationship Between National Income and Net Exports
In an economy where the total value of goods and services sold to other countries is held constant, a decrease in the fraction of income that is spent on imported goods will, all else being equal, cause the country's trade balance (exports minus imports) to worsen (decrease).