Net Exports and International Finance

KEY TAKEAWAYS

• International trade allows the world's resources to be allocated on the basis of comparative advantage and thus allows the production of a larger quantity of goods and services than would be available without trade.
• Trade affects neither the economy's natural level of employment nor its real wage in the long run; those are determined by the demand for and the supply curve of labor.
• Growth in international trade has outpaced growth in world output over the past five decades.
• The chief determinants of net exports are domestic and foreign incomes, relative price levels, exchange rates, domestic and foreign trade policies, and preferences and technology.
• A change in the price level causes a change in net exports that moves the economy along its aggregate demand curve. This is the international trade effect. A change in net exports produced by one of the other determinants of net exports will shift the aggregate demand curve by an amount equal to the initial change in net exports times the multiplier.