Question

Exports and Imports Increase Real exports of goods and services increased 6.0 percent in the second quarter, compared with an increase of 4.4 percent in the first. Real imports of goods and services increased 2.9 percent, compared with an increase of 3.1 percent. Source: Bureau of Economic Analysis, August 29,2012 Explain how the changes in exports and imports reported here influence the quantity of real GDP demanded and aggregate demand. In which of the two quarters reported did exports and imports make the greater contribution to aggregate demand growth?

Short answer

Exports and imports contributed more to aggregate demand growth in the second quarter because the net increase (3.1%) was higher than in the first quarter (1.3%).

Step-by-step solution

Identify Changes in Exports and Imports

Real exports of goods and services increased 6.0% in the second quarter, up from 4.4% in the first quarter. Real imports of goods and services increased 2.9% in the second quarter, down from 3.1% in the first quarter.

Understand the Impact on Real GDP

Real GDP is influenced by net exports, which is the difference between exports and imports. An increase in exports directly increases GDP, while an increase in imports decreases it. Hence, higher exports and lower imports increase real GDP more significantly.

Calculate the Net Contribution for Each Quarter

First quarter net contribution to aggregate demand: Growth in exports (4.4%) - Growth in imports (3.1%) = 1.3% Second quarter net contribution to aggregate demand: Growth in exports (6.0%) - Growth in imports (2.9%) = 3.1%

Compare the Contributions

Since 3.1% (second quarter) is greater than 1.3% (first quarter), the net exports made a greater contribution to aggregate demand growth in the second quarter.

Draw the Conclusion

The changes in real exports and imports in the second quarter had a larger positive impact on the quantity of real GDP demanded and aggregate demand. Therefore, exports and imports made a greater contribution to aggregate demand growth in the second quarter.

Key concepts

real GDP

Real GDP, or Real Gross Domestic Product, is a measure of the value of all goods and services produced within a country's borders, adjusted for price changes or inflation. It provides a more accurate reflection of an economy’s size and how it grows over time, as it accounts for the effects of inflation which can otherwise distort the measurement of economic output.

Real GDP can be influenced by several factors, including consumption, investment, government spending, and net exports (exports minus imports). For example, an increase in real exports means more goods and services produced domestically are being sold overseas, contributing to a higher real GDP. Conversely, an increase in imports can reduce real GDP, as it represents consumption of goods and services produced abroad.

In the exercise, the change in exports and imports influences the second quarter's real GDP. Higher exports (6.0%) and slightly lower imports (2.9%) lead to a net positive contribution to GDP. This means that for the second quarter, the economy sees a boost in production and overall economic activity. Therefore, understanding real GDP helps in assessing the actual growth and economic health of a country.

exports and imports

Exports and imports are vital components of a country's economy, affecting overall economic health and growth. Exports refer to goods and services produced domestically and sold abroad. When a country exports more, it increases production, employment, and income within the country. This boosts the nation’s GDP by bringing in revenue from foreign markets.

Imports, on the other hand, are goods and services produced abroad and purchased domestically. While essential for accessing foreign products and services, high levels of imports can negatively impact GDP since the spending goes outside the domestic economy.

The balance between exports and imports is crucial. Net exports (exports minus imports) directly affect the aggregate demand and real GDP. In the exercise, the increased percentage of exports (6.0%) in the second quarter, compared to a moderate increase in imports (2.9%), means that net exports grew, contributing positively to aggregate demand. This rise in international sales and the relatively lower import growth enhances the domestic production and economic activity, uplifting the economy as a whole.

Effective trade policies and strong international relations can improve export performance, resulting in better economic returns.

economic growth

Economic growth refers to the increase in the production of goods and services in an economy over time. It is usually expressed as a percentage increase in real GDP. Sustainable economic growth is an important goal for policymakers as it leads to higher living standards, improved employment opportunities, and better public services.

Growth in real GDP is an indicator of economic health and reflects improvements in production efficiency and the ability to supply increased consumer demands. Key drivers of economic growth include:

• Increased physical and human capital: investments in machinery, infrastructure, and education.
• Technological developments: boosts productivity and efficiency.
• Innovative government policies: incentivize business growth and international trade.

From the exercise data, the significant increase in exports and controlled growth in imports in the second quarter suggest a strong contribution to economic growth. Higher net exports indicate that the domestic economy is producing more than it is consuming from abroad, showing robust production capabilities and competitive international trade positioning. This positively impacts employment, income levels, and ultimately, the economic growth rate.

Thus, understanding the relationships between exports, imports, real GDP, and economic growth helps dissect various economic activities and their impacts on overall development.