Net Exports

What are net exports?

Net exports measure a country’s total trade, calculated as the difference between total exports and total imports. They’re also known as the balance of trade. 

Net exports help understand a nation’s economic health and trade strategies. The number of goods a country imports and exports gives a good idea of whether the government makes more of the former or the latter.

Net exports involve many foreign currencies and are easy to track with foreign exchange (FX) software. 

Why are net exports important?

Net exports simplify calculating a country's gross domestic product (GDP) as trade surpluses contribute positively to the GDP. They also determine a country's financial health. High net exports mean that a country generates more global income and is financially strong.

Benefits of net exports

Net exports are one of the most important variables in determining a country’s GDP.

Here are some advantages of net exports: 

• Countries get a positive trade balance: If their exports are greater than their imports, it means that countries spend less and receive more money from foreign nations, contributing positively to the GDP.
• Reflects a country's financial health: As mentioned above, if a country's exports are higher than imports, it generates more money from other countries. This strengthens its financial status. The government can use this extra money to purchase essential goods and services it needs from other countries. 
• Net exports indicate a country's savings: Net exports help predict a country's future exchange rates. A low-value currency makes a country's imports more expensive and exports inexpensive. On the other hand, a high-value currency makes imports inexpensive and exports more expensive.

How to calculate net exports

A country's financial health is determined by the value of its net exports. Additionally, net exports serve as a crucial indicator for different purposes such as the total income of a country and its GDP.

The net exports formula is the difference between the total exports and total imports of a country. 

Total exports are the amount of money received from supplying goods and services to another country, and total imports are the amount a country spends on procuring supplies from other countries. 

Say a country exports $1 billion worth of steel and imports $500 million worth of gasoline. 

From the above formula, the country's net export is:

$1 billion - $500 million = $500 million

This country has a trade surplus since it has a positive net export value. 

Net exports and GDP

The GDP is calculated from the market value of all goods and services a country generates.  

There are three ways to calculate a country’s GDP:

• Expenditure approach 
• Production approach
• Income approach

Of these, the expenditure approach is the most commonly used method. 

The expenditure approach to net exports

The expenditure approach takes consumption, investments, spending, and net exports of goods into account while calculating a country's GDP. 

While this only provides a nominal GDP value, it needs to be altered to reflect inflation, which, in turn, provides the real GDP value. 

The four components to calculate GDP using this method are: 

• Consumption
• Government spending
• Business investments
• Net exports

If a country has the following expenditures:

Consumption = $10,000

Investor expenditures = $15,000

Government spending = $20,000

Value of exports = $1,000

Value of imports = $500

GDP = $10,000 + $15,000 + $20,000 + ($1,000 – $500)

GDP = $45,000

Factors that influence net exports

Multiple factors influence a country's net export value. Some of them are: 

• Currency value: A currency’s exchange rate influences net exports. The exchange rate decides how expensive (or inexpensive) it is to manufacture in that country. A country with a lower currency value would have a high net export value since manufacturing is cheaper. 
• Barriers: Barriers affect net exports. These could be in the form of taxes or extra tariffs. Barriers reduce trade and make it less appealing for countries to manufacture. 
• Resources: Large quantities of natural resources positively influence net exports since other countries may have a demand for them. 
• Agriculture: Countries without the right landscape to grow their own food need to import from other countries. 
• Manufacturing: A well-functioning manufacturing sector boosts a country's net exports. However, a country’s inability to manufacture can negatively impact net exports since it may need to import goods.

Positive vs. negative net export

A positive net export implies a trade surplus, meaning a country exports more goods than imports. This indicates high global demand for that country's goods or services, and it receives more money from foreign markets.

If a country has a negative net export value, it has a trade deficit (imports are greater than exports). This country spends more money on foreign markets than it receives.

Exports are all goods a country sends to the rest of the world, such as:

• Supplies
• Medicines
• Fruits and vegetables
• Tools
• Machinery

Net exporter vs. net importer

A country produces goods based on resource and labor availability. If a country cannot efficiently produce certain goods or services but needs them, it can import from other countries that produce and sell these goods or services. Many countries export to countries that lack resources.

A net exporter sells more goods to foreign nations than it imports. China and Germany are two examples of high-value net exporters. 

On the other hand, a net importer is a country that imports more goods than it exports over a period. The United States and the United Kingdom are two examples of net importers since they primarily purchase products and materials from other countries. 

Net exporters have a trade surplus, while net importers have a trade deficit. Countries can be net exporters in one region and net importers in others. For example, India is a net exporter of raw materials and a net importer of oil.