Exchange Rates and Net Exports
| English | Chinese | Pinyin |
|---|---|---|
| aggregate demand | 总需求 | zǒng xū qiú |
| net exports | 净出口 | jìng chū kǒu |
| exports | 出口 | chū kǒu |
| imports | 进口 | jìn kǒu |
From the exchange rate back to the economy
- An exchange-rate move feeds straight back into a country's trade.
- And trade feeds into the whole economy through aggregate demand.
- The chain: exchange rate → net exports → aggregate demand → output.
- Let's follow a strong currency through that chain.
Net exports equal exports minus ______.
NX = exports − imports.
When a currency appreciates, a country's exports become:
A stronger currency raises the foreign-currency price of exports.
A stronger currency lowers net exports
- When a currency appreciates, that country's goods become dearer for foreigners.
- At the same time, foreign goods become cheaper at home.
- So exports 出口 fall and imports 进口 rise.
- That lowers net exports 净出口, where $NX = \text{exports} - \text{imports}$.
Stronger or weaker currency?
A stronger currency lowers net exports and shifts AD left; a weaker currency raises net exports and shifts AD right.
A stronger currency lowers net exports, so aggregate demand shifts:
Net exports are part of AD, so lower NX shifts AD left.
A weaker currency raises net exports and shifts aggregate demand right.
Cheaper exports and dearer imports lift NX, pushing AD right.
Net exports move aggregate demand
- Net exports are one component of aggregate demand 总需求.
- A stronger currency lowers net exports, shifting aggregate demand left (weaker output).
- A weaker currency raises net exports, shifting aggregate demand right (stronger output).
- So the exchange rate is a lever on the whole economy, not just trade.
A US machine rises from 900 to 1000 euros after the dollar appreciates. The likely result is:
A dearer machine loses foreign buyers — exports drop.
Order the chain from a stronger currency to weaker output.
Appreciation → trade worsens → NX falls → AD left.
Worked example
- Worked idea. The dollar appreciates sharply. A US machine that cost a European buyer 900 euros now costs 1000 euros — so Europe buys fewer. US exports fall.
- Meanwhile European goods look cheap to Americans, so US imports rise.
- Net exports drop, and US aggregate demand shifts left.
- This is why a very strong currency can slow an economy.
An exchange-rate change moves trade, then the economy. A stronger currency makes exports dearer and imports cheaper, so net exports ($NX = X - M$) fall. Because net exports are part of aggregate demand, a stronger currency shifts AD left (weaker output); a weaker currency shifts AD right.