Net Trade (X-M) (Edexcel A Level Economics A)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

Influences on the Net Trade Balance

  • The net trade balance is the difference between the value of exports and imports (X-M)

  • The net trade balance is influenced by changes to real income, exchange rates, state of the world economy, and the degree of protectionism


A Table Showing How Changes to Each of the Influencing Factors Effects Exports and Imports

Change in Condition

Effect on Exports

Effect on Imports

(X-M)

UK real income increases 

Little effect

Consumers purchase more

Trade balance weakens

Real income increases abroad

Customers overseas purchase more UK products; exports increase

Little effect

Trade balance strengthens

UK £ appreciates

Exports more expensive for customers overseas; exports decrease

UK consumers' money goes further abroad; imports increase

Trade balance weakens

UK £ depreciates

Exports less expensive for customers overseas; exports increase

UK consumers' money is worth less abroad; imports decrease

Trade balance strengthens

World economy booms

Increased demand for UK exports

Little effect

Trade balance strengthens

World economy slows

Decreased demand for UK exports

Little effect

Trade balance weakens

Protectionism increases

Depends on retaliation measures from other countries

Decreased demand for imports as they are more expensive

Trade balance strengthens

Protectionism decreases

Likely to increase

Increased demand for imports as they are less expensive

Trade balance weakens

Examiner Tips and Tricks

When evaluating the extent to which the trade balance strengthens or weakens as a result of exchange rate changes, remember that it is dependent on the price elasticity of demand (PED) of the exports and imports.

This is explained by the Marshall Lerner Condition and the J Curve.

The Marshall-Lerner Condition states that the depreciation/devaluation of a country's currency will lead to an improvement in its net trade balance only if the sum of the price elasticities of its exports and imports is greater than one

The J Curve argues that a net trade balance will worsen in the short term after a currency devaluation but then improve in the medium to longer term.

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Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

Jenna Quinn

Author: Jenna Quinn

Expertise: Head of New Subjects

Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.