Shift in Net Export Function

Net export function NX relates net exports(X- M) to national income. Any change in either exports or imports or both will shift the NX. Some of the factors that influence export. We have assumed that exports are autonomous and thus are not affected by changes in country’s GDP while imports are positively related to GDP, thus, making (X- M) to be negatively related to GDP. let us now analyse what factors influence exports and affect NX or net export function.

GDP in Foreign Countries which are trading partners affects the volume of exports of given economy. When foreign GDP increase, their consumption expenditure also rises. Thus, their spending on consumer goods, both domestically produced as well as imported, rises. Their imports are exports of this economy which thus also rise. The opposite happens when foreign GDP decreases.

Relative International Prices: A country’s export is influenced by the relative prices of goods in various trading countries. A country exports those goods which are relatively cheaper in its economy and imports what is costlier within the country and relatively cheaper elsewhere. However, if relative international price change and the goods hitherto exported become relatively costlier, exports will decline thus causing a downward shift in net export function. The reverse will happen if relative price further fall in the economy’s. The relative price changes are caused by (i) differences in the inflation rate and (ii) changes in the foreign exchanges rates.

Inflation rate differences cause prices to rise more sharply in some countries than in others. This causes changes in relative prices. Relative price rise in the domestic economy due to a higher rate of inflation will make its goods costlier for foreign buyers and thus lead to a fall in exports. A relative price fall due to low rate of inflation than that in other countries will make goods cheaper for foreign currency and thus discourages exports and increase imports. On the other hand, depreciation of domestic currency encourages exports and discourages imports.

Upwards shifts in NX cause GDP to increase while a downward shift in NX function will lead to a fall in GDP.