The difference between a country’s value of imports and its value of exports
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What is Net Export?
Net export is the difference between a country’s value of imports and its value of exports. It can be either positive or negative.
Summary
- Net export is the difference between the value of a country’s exports versus its imports.
- The net export value can be either positive (trade surplus) or negative (trade deficit).
- The net export variable is used to compute the GDP of a country.
Positive vs. Negative Net Export
A positive net export figure shows a country’s trade surplus. It means that the value of the nation’s imports is lower than the value of its exports. A country with a trade surplus receives more money from a foreign market than it spends.
A negative net export figure is a trade deficit for a given country. It means that the overall value of the country’s imports is greater than the overall value of its exports. A country with a trade deficit spends more money in a foreign market than it makes.
How to Calculate Net Export
The net export of a country can be computed as follows:
Net Exports = Value of Exports – Value of Imports
Where:
- Value of exportsis the amount of money generated by a given country for goods and services from a foreign market.
- Value of Imports is the amount of money that the nation has spent on services and goods from other countries.
For example, let us assume Malaysia exports $1.89 billion of rubber and imports $250 million of rubber and $390 million of gasoline from Indonesia.
Using the formula above, Malaysia’s net export is calculated as:
Net export = $1.89 billion – ($250 million + $390 million) = $1.89 billion – $640 million
Net export = $1.25 billion
Malaysia’s net exports are $1.25 billion.
Importance of Net Export
- The net export variable is very important in the computation of a country’s GDP. A trade surplus is added to the country’s GDP.
- Net exports can also serve as a measure of financial health for a country. A country with a high export value generates income from other countries. It reinforces the financial standing of that country, as the inflow of money gives it the opportunity to trade with other countries.
How Net Exports Relate to GDP
Gross domestic product (GDP) is a calculation of the market value of all final goods and services generated by a country over a given period of time. There are three ways to determine or compute the GDP of a country. They include:
- Production (or output or value-added) approach
- Income approach
- Expenditure approach (the most common)
Expenditure Approach
The expenditure method is a gross domestic product (GDP) measurement system that incorporates consumption, investment, government spending, and net exports. The approach yields nominal GDP, which then needs to be modified to cater for inflation, thereby producing the actual GDP.
There are four main cumulative expenditures for computing GDP: household consumption, government spending on goods and services, business investment, and net exports (which are equivalent to exports minus imports of goods and services).
Calculating GDP Using the Expenditure Approach
GDP = C + I + G + (X – M)
Where:
- C – Consumer spending on goods and services
- I – Investor spending on business capital goods
- G – Government spending on public goods and services
- X – Exports
- M – Imports
Example
Given the following information about Country X:
- Consumer spending for the first quarter of the year was $950,000;
- Fixed investment spending in the economy stood at $359,000 (consisting of $140,000 on residential property, $90,000 on purchases of equipment, and $129,000 on investments in inventories);
- Government expenditures stood at $600,000;
- Exported products valued at $540,000; and
- Imported goods valued at $290,000.
Calculate the country’s net export and its GDP:
Net export = $540,000 – $290,000
Net export = $250,000
GDP = $950,000 + $359,000 + $600,000 + $250,000
GDP = $2.159 million
Country X posts a trade surplus (net export) of $250,000, and its GDP is $2.159 million.
More Resources
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