Net exports measure a country’s total trade, calculated as the difference between total exports and total imports. They’re also known as the balance of trade.
Net exports help understand a nation’s economic health and trade strategies. The number of goods a country imports and exports gives a good idea of whether the government makes more of the former or the latter.
Net exports involve many foreign currencies and are easy to track with foreign exchange (FX) software.
Net exports simplify calculating a country's gross domestic product (GDP) as trade surpluses contribute positively to the GDP. They also determine a country's financial health. High net exports mean that a country generates more global income and is financially strong.
Net exports are one of the most important variables in determining a country’s GDP.
Here are some advantages of net exports:
A country's financial health is determined by the value of its net exports. Additionally, net exports serve as a crucial indicator for different purposes such as the total income of a country and its GDP.
The net exports formula is the difference between the total exports and total imports of a country.
Total exports are the amount of money received from supplying goods and services to another country, and total imports are the amount a country spends on procuring supplies from other countries.
Net exports = Total exports – Total imports
Say a country exports $1 billion worth of steel and imports $500 million worth of gasoline.
From the above formula, the country's net export is:
$1 billion - $500 million = $500 million
This country has a trade surplus since it has a positive net export value.
The GDP is calculated from the market value of all goods and services a country generates.
There are three ways to calculate a country’s GDP:
Of these, the expenditure approach is the most commonly used method.
The expenditure approach takes consumption, investments, spending, and net exports of goods into account while calculating a country's GDP.
While this only provides a nominal GDP value, it needs to be altered to reflect inflation, which, in turn, provides the real GDP value.
The four components to calculate GDP using this method are:
GDP = Consumption + Investor expenditures + Government expenditures + (Exports – Imports)
If a country has the following expenditures:
Consumption = $10,000
Investor expenditures = $15,000
Government spending = $20,000
Value of exports = $1,000
Value of imports = $500
GDP = $10,000 + $15,000 + $20,000 + ($1,000 – $500)
GDP = $45,000
Multiple factors influence a country's net export value. Some of them are:
A positive net export implies a trade surplus, meaning a country exports more goods than imports. This indicates high global demand for that country's goods or services, and it receives more money from foreign markets.
If a country has a negative net export value, it has a trade deficit (imports are greater than exports). This country spends more money on foreign markets than it receives.
Exports are all goods a country sends to the rest of the world, such as:
A country produces goods based on resource and labor availability. If a country cannot efficiently produce certain goods or services but needs them, it can import from other countries that produce and sell these goods or services. Many countries export to countries that lack resources.
A net exporter sells more goods to foreign nations than it imports. China and Germany are two examples of high-value net exporters.
On the other hand, a net importer is a country that imports more goods than it exports over a period. The United States and the United Kingdom are two examples of net importers since they primarily purchase products and materials from other countries.
Net exporters have a trade surplus, while net importers have a trade deficit. Countries can be net exporters in one region and net importers in others. For example, India is a net exporter of raw materials and a net importer of oil.