Question

A depression abroad will tend to _____ our exports, which in turn will _____ net exports, which in turn will _____ equilibrium real GDP. a. Reduce; reduce; reduce. b. Increase; increase; increase. c. Reduce; increase; increase. d. Increase; reduce; reduce.

Short answer

Option a: Reduce; reduce; reduce.

Step-by-step solution

Analyzing the Impact of a Depression Abroad on Exports

When there is a depression abroad, other countries experience reduced economic activity. As a result, the demand for exports from our country decreases because other countries have less income and thus buy fewer goods and services from us.

Understanding the Effect on Net Exports

Net exports are calculated as the total value of exports minus imports. If our exports decrease due to reduced demand from abroad, net exports will also decrease since we are exporting less.

Examining the Consequence on Equilibrium Real GDP

Equilibrium Real GDP is affected by net exports. A decrease in net exports means there is less demand for our country's goods and services, which reduces overall production and income in the economy. Therefore, equilibrium real GDP will decrease.

Key concepts

Net Exports

Net exports play a crucial role in understanding a country's economic health. The term 'net exports' is defined as the difference between the value of a country's exports and its imports. In simple terms:

• If exports exceed imports, net exports are positive.
• If imports exceed exports, net exports are negative.

When a country experiences positive net exports, it indicates that it is selling more goods to other countries than it is buying from them. On the contrary, negative net exports mean the country is buying more goods from abroad than it sells.
This balance affects the country's overall economic performance. As net exports increase, there is a higher demand for a country's goods and services, potentially leading to stronger production and economic growth. Conversely, decreased net exports can signify a reduction in production and a slowing economy.

Real GDP

Real Gross Domestic Product (Real GDP) is a term used to describe the total economic output of a country, adjusted for inflation. It provides a clear picture of economic activity.
Real GDP measures the value of all final goods and services produced within a country's borders during a specific timeframe. By adjusting for inflation, Real GDP offers a more accurate depiction of an economy's true health compared to nominal GDP, which doesn't account for price changes.
Factors affecting Real GDP include:

• Consumption: The total value of all goods and services bought by households.
• Investment: Spending on capital goods that will be used for future production.
• Government Spending: Total government expenditures on goods and services.
• Net Exports: The difference between a nation's exports and imports.

When any of these components change, Real GDP can rise or fall. For instance, when net exports decrease due to reduced foreign demand, it places downward pressure on Real GDP, as it signifies less demand for domestic products.

International Trade

International trade involves the exchange of goods and services between countries. This exchange is vital for enriching economies by providing access to products not available domestically while offering local producers new markets.
International trade is governed by:

• Trade Policies: Rules and agreements that govern trade between countries.
• Tariffs: Taxes on imports that can influence trade flow.
• Exchange Rates: The value of one currency for the purpose of conversion to another.

Trade enables countries to specialize in the production of goods and services where they have a comparative advantage, meaning they can produce at a lower opportunity cost compared to others. This specialization leads to more efficient production globally and potentially higher worldwide GDP.
However, international trade also affects domestic economies. A depression abroad impacts our exports, as foreign buyers reduce their imports. This causes a ripple effect, potentially reducing net exports and weakening Real GDP, demonstrating the interconnected nature of global economies.