Question

Assuming the economy is operating below its potential output, how does an increase in net exports affect real GDP? Why is it difficult, perhaps even impossible, for a country to boost its net exports by increasing its tariffs during a global recession? Use examples.

Answer 1

An increase in the level of Net Exports will increase the level of aggregate expenditure in the economy. As the level of aggregate expenditure in the economy increases, the level of aggregate demand in the economy will increase. In the diagram below, the economy is initially at point E1 where actual level of GDP is below the full employment of GDP in the economy and economy is in the recessionary gap. I

An increase in net exports will shift the AD curve rightwards to AD' and new equilibrium shifts from point E1 to Point E2 where the level of real GDP has increased and price level has also increased in the economy. Thus, increase in net exports increases real GDP in the economy.

During the time of global recession, the over income level of all world economies decreases. As the level of foreign income in the economy decreases, the level of exports also decreases because demand for the country's exports from other nations will decrease. This will reduce the value of exports and thus net exports of the nation will decrease. Imports are already low during the time of recession. Thus, during the time of global recession, it is not impossible to increase Net exports of the nation.