Question

Explain specifically how negative net exports affect aggregate expenditures in the private, open economy and equilibrium GDP. Explain specifically how positive net exports affect aggregate expenditures in the private, open economy and equilibrium GDP. Be sure to explain how the graph of aggregate expenditures is impacted by each situation along with the size of the change in equilibrium GDP relative to the size of the change in aggregate expenditures.

Answer 1

Net exports = exports - imports

It affects aggregate expenditure in an open economy . Aggregate spending on domestic output rises when exports are more and imports are less , vice versa . Exports create domestic production, income, and employment due to foreign spending on domestically produced goods and services . On the other hand imports reduce the total income or sum of consumption and investment .

Negative net exports depicts the condition where imports are greater than exports , so decrease aggregate expenditures more than what they would be in a closed economy and thus have a contractionary effect .The multiplier effect further worsens the situation .

Exactly opposite situation occurs when net exports are positive . It has an expansionary effect . The multipler effect ( 1 / 1 - MPC ) adjusts equilibrium GDP accordingly to the volume of change of net exports . The aggregate expediture curve shifts upwards and downwards when there is positive and negative net exports respectively .