How are Net Exports a Part of Aggregate Demand?

Recall that exports are domestically produced products that sell abroad while imports are foreign produced products that consumers purchase domestically. Since we define aggregate demand as spending on domestic goods and services, export expenditures add to AD, while import expenditures subtract from AD.

Two sets of factors can cause shifts in export and import demand: changes in relative growth rates between countries and changes in relative prices between countries. What is happening in the countries' economies that would be purchasing those exports heavily affects the level of demand for a nation's exports. For example, if major importers of American-made products like Canada, Japan, and Germany have recessions, exports of U.S. products to those countries are likely to decline. Conversely, the amount of income in the domestic economy directly affects the quantity of a nation's imports: more income will bring a higher level of imports.

Relative prices of goods in domestic and international markets can also affect exports and imports. If U.S. goods are relatively cheaper compared with goods made in other places, perhaps because a group of U.S. producers has mastered certain productivity breakthroughs, then U.S. exports are likely to rise. If U.S. goods become relatively more expensive, perhaps because a change in the exchange rate between the U.S. dollar and other currencies has pushed up the price of inputs to production in the United States, then exports from U.S. producers are likely to decline.

Related Topics

• Keynesian Perspective of Aggregate Demand
• Recessionary and Inflationary Gap
• Consumption Expenditure
• Investment Expenditure
• Government Spending in Aggregate Demand
• Net Exports in Aggregate Demand
• Keynesian Economic Analysis
• Wage and Price Stickiness 
• Coordination Argument of Wage Stickiness
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• Keynesian Assumptions in the Aggregate Demand and Aggregate Supply Model
• Macroeconomic Externality
• Expenditure Multiplier
• The Phillips Curve
• Keynesian Approach to Unemployment and Inflation
• Keynesian Perspective on Market Forces
• NeoClassical Economics
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• Potential GDP in the Aggregate Demand Aggregate Supply Model
• Prices are Flexible in the Long Run
• Keynesian and NeoClassical View of Long-Run Aggregate Supply and Demand
• Speed of Macroeconomic Adjustment of Wages and Prices
• Paradox of Rationality
• Rational Expectations Theory
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• Mechanism Design Theory
• What is the Adaptive Expectations Theory
• Measure Inflation Expectations
• Neoclassical Phillips Curve Tradeoff
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