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Net export simply refers to the difference between the export of a country and its import. But in a broad sense, net export is a factor that plays a key role in determining the national income of a country. From the viewpoint of a country, export is a source of income whereas import is a kind of expense. Obviously, the export is desired to be more than import to have a sound economic balance. The net export formula helps the nation to calculate whether this favorable condition is maintained in its foreign trade.
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Key terms: Exports, Imports, National Income, Services, GDP, Foreign trade, NNP, Income
Also read: Difference between Sequence and Series
What Are Exports And Imports?
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Trade-in a country can be broadly classified into internal trade and foreign trade. Internal trade happens within the national boundaries of a country. There, the production, sale, and consumption are made by people residing in the same nation. But foreign trade is where the trade of goods and services happens crossing the national boundaries.
For instance, consider two countries, say India and China. Maruti is a trader in motor cars, which sells its cars in India alone, and provides services to its users in India alone. This is called internal trade. Think if Maruti decides to sell its cars in china also, Maruti has to produce the cars in India and take the cars to China through ships. This kind of trade is called foreign trade. The act of moving goods and services from one country to another for sale is called export, whereas the receipt of goods and services from other countries for consumption is known as an import.
What Are Net Exports?
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Export and import are two major components of foreign trade. From the viewpoint of a nation, export is an income to the country. The products produced in a country are sold in another to earn money from there. In the same sense import is an expense to the country. So, when the foreign trade position becomes favorable, the total exports should exceed the total income. Net export is the difference between the total value of exports of a country and the total value of imports of the country.
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| Related Links | ||
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| Marginal Cost Formula | National Income Formula | Purchasing Power Parity Formula |
| Money Multiplier Formula | Marginal Product Formula | GDP Formula |
Net Exports Formula
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The net exports can be represented as a formula as below:
| Net Exports = Value of Total Exports – Value of Total Imports |
A positive net export shows the country has a foreign trade surplus, which is favorable whereas a negative figure of net exports or foreign trade deficit is an unfavorable situation in international trade. Currently, India is facing foreign trade deficit.
How To Calculate Net Exports?
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The calculation of net exports of a country is an important procedure to know the trade position of the country in the case of foreign trade. When we have a trade deficit in net exports, measures are taken to correct it shortly. Moreover, anticipated trade deficits are also measured using the net exports formula.
Net exports of a country can be calculated using the below formula:
- Calculate the total value of goods that are produced intending to be exported. This can be easily calculated by the director-general of foreign trade in India, who would have proper data on this.
- Add the total value of services exported from the country. Usually, exported services mean IT services like BPO and Software development, etc... The total of goods and services exported would be the total value of exports from the country.
- Similar to the above procedures, find the value of goods and services imported, the aggregate of which would be the total value of imports of the country.
- Deduct the total value of imports of the country from the total value of exports from the country, which would be the net exports of the country.
Also read: Difference between Sequence and Series
National Income And Net Exports
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The national income of a country is the total income generated by residents of a nation, both in the country and at foreign utilities. This means that when we view national income, the income from abroad is an inevitable part that constitutes the final formulation of national income. But the net export doesn’t become a direct part of the national income and becomes a part of the net factor income from abroad. But this too varies with the approach we take to calculate national income.
From the perspective of macroeconomics, national income is a journey from the Gross Domestic Product (GDP) at factor cost to the Net National Product (NNP) at factor cost. The addition of net factor income from abroad converts GDP to NNP. The net factor income from abroad obviously includes the difference between the export and import of a country, which is the net export.
Expenditure Method and Net Exports
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Expenditure method is one of the three major methods of calculating national income. Rather than other methods, this method gives us a clear idea of how net export becomes part of national income.
According to the expenditure method,
National income = consumption by residents + government expenditure + investment expenditure + net exports
Here, it is depicted that the GDP of a country is constituted by the private and public expenditure and investment expenditure. When we add the difference between export and import (net exports) to GDP, the national income is ascertained.
Also read: Definite Integral Formula
Things to Remember
- Net exports refer to the difference between the value of total exports and the value of total imports of a country, for a given period.
- Net exports = value of total export – the value of total imports.
- When the value of net exports is positive, the country is said to have a foreign trade surplus whereas if the figure is negative, the country is said to have a foreign trade deficit.
- A foreign trade surplus is a favorable situation for the international trade of a country; whereas if a trade deficit arises, the government will take measures to increase its export and reduce imports.
- Net exports are an integral part of the national income calculation as it holds the major share of the net factor income that a country earns from abroad.
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Sample Questions
Ques. What is net export? (1 mark)
Ans: Net export refers to the difference in the value of total export and import of a country. A positive figure for net exports shows that the country has a surplus in its foreign trade.
Ques. What are the implications of net export in the calculation of national income? (2 marks)
Ans: Net exports have an important part in the calculation of the national income of a country. The total of domestic production/ consumption is added to the receipts from abroad to conclude the national income.
When observed from the side of expenditure, the national income would have the following components:
- Consumption By Residents
- Government Expenditure
- Investment Expenditure
- Net Exports
Thus it is clear that one of the major four components of the national income is net exports.
Ques. Explain how the difference in export and import impact the economical condition of a country? (2 marks)
Ans: The economic condition of a country is indicated by the national income of a country. Net exports, being an integral part of the national income, can affect the economic condition directly and indirectly.
There are two major situations in which the net export acts as an indicator of economic condition:
- Trade surplus: Where the value of total exports is more than the value of total imports, which denotes that there is a sound economy.
- Trade deficit: Where the value of total export would be less than that of the value of total import, which denotes a slow-paced economy.
Ques. State the formula for finding net exports, and define each of its components. (2 marks)
Ans: Net exports = value of total export – the value of total import
Here, the value of total export refers to the total monetary value of all goods and services exported from a country to a different country, calculated in the terms of a standard currency (usually, US Dollar).
The value of total import refers to the total monetary value of all goods and services imported from different countries to a country, calculated in the terms of a standard currency (usually, US Dollar).
Ques. The investment expenditure of a country has consumption expenses and investment expenses as its components. Explain the components of investment expenditure, emphasizing the importance of net exports. (2 marks)
Ans: From the viewpoint of the expenditure method of calculating national income, final expenditure refers to the total expenditure of an economy, where all the earnings of the nation are spent.
Final expenditure = consumption expenditure + investment expenditure
Where,
Investment expenditure = gross domestic fixed capital formation + net addition to stock + net export.
In the above-stated equation, the gross domestic fixed capital formation and net addition to stock refer to the part of the national income that is employed by the central authority on various long-term assets. Beyond that, the difference between the value of total export and import becomes part of the investment expenditure.
Ques. State the different conditions in which the net exports become a positive and negative indicator. (2 marks)
Ans: While calculating the net exports, the difference may be either positive or negative. When there is a positive figure, it’s called Trade surplus, where the value of total exports is more than the value of total imports, which denotes that there is a sound economy.
The condition of negative net exports is known as a Trade deficit, where the value of total export would be less than that of the value of total import, which denotes a slow-paced economy.
Ques. In a country, the net exports of the year 2020 were mentioned as -$23 million. If the import of the country was $ 13 million for the year, find the export of the year. (2 marks)
Ans: Net exports = value of total exports – the value of total imports
Given, -23 = value of total export – 13
→ Value of total export = 23 – 13
= $ 10 million
Ques. It was noticed that country C had a net export of $32.45 million in the year, 2000. The import of the year was $12.33 million. Moreover, it is given that the worth of goods exported during the year was $8.7million. Then find the worth of service exported by the country during the year. (2 marks)
Ans: Net exports = value of total exports – the value of total imports
Also, the value of total exports = value of goods exported + value of services exported.
So, 32.45 = (8.7 + value of services exported) – 12.33
→ Value of services exported = 32.45 – 8.7 + 12.33
Value of services exported = $36.08 million
Ques. A northeastern country marked exports of $ 198 million and imports of $ 450 million, during the last year. This year, the country had a net export of - $45 million. Comment on the export trade of the nation. (2 marks)
Ans: Net exports = value of total exports – value of total imports
Therefore, last year’s net exports = 198 – 450
=- $ 252 million
The northeastern country is having a trade deficit for the last two years. But the deficit has a reduction of $ 207 million in the latter year.
Ques. Assume that the net exports of India were marked as $ 0 during 2020 March. The export of 2019 was $ 1.5 billion. If the net export during the year 2021 is marked as -$ 21.9 billion, comment on the foreign trade position of India for the last three years. (3 marks)
Ans: Foreign trade position of the nation can be of three types: foreign trade deficit, foreign trade surplus, or foreign trade equilibrium.
During 2020, India had zero net exports. This means that the value of total exports during that period was equal to that of the value of imports during the period. This situation is called foreign trade equilibrium.
During 2019, India’s net exports were, $1.5 billion. Here we have a positive figure because the export during the period was more than imports. This situation is called foreign trade surplus.
In 2021, India had -$ 21.9 billion as net exports this negative figure shows that the value of exports of the period was less than the value of imports. This situation is called a foreign trade deficit.
Ques. Country X had a net export of $45 million in the year, 2010. The import of the year was $33 million. Moreover, it is given that the worth of service exported during the previous year (2009) was $7.5 million, economists expected an increase in export value of services in 2010 by 10.5%. Then what would be the worth of goods exported by the country during the year? (3 marks)
Ans: Net exports = value of total exports – value of total imports
Also, value of total exports = value of goods exported + value of services exported.
Here, value of service = 7.5 + 10.5% hike
= 7.5 + 0.75
= 8.25 million
So, 45 = (8.25 + value of goods exported) – 33
→ Value of goods exported = 45 – 8.25 + 33
Value of goods exported = $69.75 million
Ques. A western country marked exports of $ 198 million and imports of $ 450 million, during 2010. During 2011, the country had a net export of - $35 million. The government authorities calculated that the export of 2012 will have a fall of 12%. But instead, the export rate of 2012 showed growth at the rate of 2%. Import doubled during 2012 Calculate net exports of the country if
(1) The government calculation was the reality
(2) The actual export growth occurred. (4 marks)
Ans: Net exports = value of total exports – value of total imports
Therefore, the net export of the country during 2012 can be calculated at two situation
- If the calculation of government authorities was right
Value of Import = 450 x 2 = 900 million
Value of Export = 198 – 12% of 198
= 174.24
Net exports = 174.24 – 900 million
= - 725.76 million
- When the actual rate of export is considered
Value of Import = 450 x 2 = 900 million
Value of Export = 198 + 2% of 198
= 201.96
Net exports = 201.96 – 900 million
= - 698.04 million
(note to the editor: 10 internal links are not added to the article as no board exam article related to the topic is available.)
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