Net Exports

Net Exports Definition

Net exports of any country are measured by calculating the value of goods or services exported by the home country over the specific period of time minus value of the goods or services imported by the home country during the same period of time. The net number calculated includes a variety of goods and services which exported and imported by the country, such as machinery, cars, consumer goods, and etc.

Net export is one of the important variables which are used for the calculation of Gross domestic product of any country. When net exports are positive, then it represents a trade surplus and when it is negative, then it represents trade deficit in any country.

Net Exports Formula

The net exportsNet ExportsNet exports of any country are measured by calculating the value of goods or services exported by the home country minus the value of the goods or services imported by the home country. It includes various goods and services exported and imported by the government, like machinery, cars, consumer goods.read more of any country can be calculated using the below-mentioned formula

Net Exports = Value of Exports – Value of Imports
Net-Exports

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For eg:
Source: Net Exports (wallstreetmojo.com)

Where,

  • Value of Exports = Total value of foreign countries spending on the goods and services of the home country.
  • Value of Imports = Total value of spending of the home country on the goods and services imported from foreign countries.

Example of the Net Exports

For example, the United State’s total spending on the goods and services imported from foreign countries are $ 250 billion last year. During the same year, the total value of foreign countries spending on the goods and services of the United States was $ 160 billion. Calculate the net exports of the country for the given year.

Solution:

Value of Exports of U.S. = $ 250 billion

Value of Imports of U.S. = $ 160 billion

Net Exports Example.png
  • Net Export Equals $ 250 billion – $ 160 billion
  • = $ 90 billion

In the present case, since the net exports are positive, they will be added to the Gross domestic product of the country.

Advantages

  1. It is one of the important variables which are used for the calculation of Gross domestic product of any country. When total value of foreign countries spending on the goods and services of the home country i.e., exports by home county is higher than total value of spending of the home country on the goods and services imported from the foreign countries than country have positive balance of the trade for given period and the net exports will be added to the GDP of the country.
  2. The calculation of the net exports of any country helps in determining the financial health of that country. When the exports of the country are high then it shows that it is generating money from the other countries which can strengthen the financial status of the country as it has the inflow of money coming into country which can be used to purchase more amounts of different products from the other countries.
  3. When the whole exports are considered and analyzed then it could be a good indicator showing the savings rate of the country, its future exchange rates, etc.

Disadvantages

There are several debates between the different economists with respect to the net exports which could create a problem in understanding it exactly by the users of the same. In one such debate, many economists have the opinion that if any country is having consistent trade deficit then that will harm its economy and will lead to the creation of the pressure in the country to devalue its currencyDevalue Its CurrencyCurrency devaluation is deliberately done in order to adjust the established exchange rates by the government and it is mostly done in the cases of fixed currencies. This mechanism is used by economies with a semi-fixed or fixed exchange rate, and it should not be confused with depreciation.read more, and thereby lowering its interest rates.

However, the same does not hold true in case of the United States where there is the trade deficit and even with the negative net exports; still, the U.S. has the world’s largest GDP

Important Points

  1. When the total value of foreign countries spending on the goods and services of the home country i.e., exports by home county is higher than the total value of spending of the home country on the goods and services imported from the foreign countries than country have positive balance of the trade for a given period.
  2. Another term which is used to indicate the net exports is the balance of tradeBalance Of TradeThe balance of trade (BOT) is the country’s exports minus its imports. BOT is one of the significant components for any current economic asset as it measures a country’s net income earned on global investments.read more.
  3. There are different factors which could affect the net exports and the relative prices of the imports and exports of the country and these include exchange rates, prosperity abroad and tariffs, etc.
  4. The calculation of the net exports of any country serves as the measure of exports of the country to the foreign countries and usually is expressed as the percentage of the Gross Domestic Product of the country. Using this, governments of any country can quantify its exports into the percentage of the domestic or home country’s goods and services that the foreign sector is purchasing.
  5. When Net Exports is positive, then it represents a trade surplus and when it is negative, then it represents a trade deficit in any country.

Conclusion

Net exports are the difference between the amount of the products which shipped out of the home country or sold to another country and amount of products which are shipped into the home county or purchased from the other countries which are realized by home country’s economy. The calculation of the net exports of any country helps in determining the financial health of that country.

When the exports of the country are high then it shows that it is generating money from the other countries which can strengthen the financial status of the country as it has an inflow of money coming into country which can be used to purchase more amounts of different products from the other countries. Value of the net exports of any country will be positive or negative will depend on whether the country is an overall importer or exporter.

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This has been a guide to Net Exports and its definition. Here we discuss formula and example of net exports calculation along with advantages and disadvantages. You can learn more about accounting from the following articles –

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