Net Export Function

The net export NX refers to the difference between export and import (X- M). The net export function shows the relation between net export and national income. We assume exports to be exogenously determined and not dependent on level of our national income. But imports are related to income through marginal propensity to import. Increase in level of income leads to higher consumption expenditure on both the domestically produced as well as the imported goods. And increase in production to meeting growing home demand due to rising incomes also has some import content such as machinery or raw materials. Thus, imports are a function of income or

M = mY

where m is the marginal propensity to import.

Since, exports are autonomous and constant while imports are positively related to national income, net exports NX(X-M) will be high because at low income levels X > M and at high levels M > X and thus net exports NX or (X-M) will be negative. This negative or inverse relationship between net exports NX and GDP is called the net export function. The NX curve is negatively sloped. Till the income level where X = M, NX curve remains above X – axis and beyond that income level move below the X-axis, and beyond that income level move below the X-axis.