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The Influence of Net Exports on the American Economy

By: Matt Dodson and Molly Mann

Between 1985 to 1995 the United States economy shifted from one defined by balanced trade, in which exports roughly equaled imports, to an economy dominated by imports. The drastic change in net exports represented the transfer from a self-reliant US economy to one more globally influenced. The economy evolved due to specialization and gains from trade brought on by rising education levels. The increase in American education led to an increase in high-skilled employment opportunities decreasing the need for unskilled labor as factory jobs relocated overseas. This idea in specialization of goods allowed the United States to greater participate in global-trade. The Net Exports of Goods and Services Graph demonstrates the long term trends of increasing imports from 1970 through 2015.

While analyzing smaller sections of the graph, common themes appear during and following times of recession. The graph illustrates that net exports tend to decrease leading into recessions, contrasting with increases towards the end of a recession. The shift in net exports at the end of periods of recession bolsters the economy and generates a period of rebuilding. Even though the idea of specialization suggests that increased trade can prove beneficial in many ways, a government might cut back on international trade and focus on promoting domestic competition in response to economic struggles. During the short term, like a time of economic volatility, higher net exports have a positive effect on the economy, generating income and employment opportunities, while lower net exports tend to have a more negative effect on the national economy.

But how do net exports influence GDP? This graph presents the United States Gross Domestic Product in a percent change method showing yearly change where positive values represent economic growth from the year before and negative values indicate a decline from the previous year. The almost exclusively positive GDP percent change indicate that GDP continues to increase, although at a slower rate after the recessions in the 1980's, while exports rapidly decrease during this time. Notably, net exports comprise less than 4% of the US GDP, while categories such as goods and services consume over two-thirds. This indicates the importance of trading on the economy as a whole, but proves that net exports do not necessarily serve as predictors or definers of Gross Domestic Product figures. In conclusion, net exports improve understanding of the economic climate but fail to define the entire financial forecast.

Sources:
FRED GDP
FRED NETEXP

15 thoughts on “The Influence of Net Exports on the American Economy

  1. bernsteinl20

    You mentioned in the beginning how America has shifted away from balanced trading. In an increasingly globalized economy this was bound to happen. But, is this best for our economy? Would we be better off if trading was more even? This could allow the US to be self-sufficient at least a little bit incase there is some crisis in another part of the world. This is something to consider because that crisis could effect our entire way of life if it makes it difficult to export an important good.

    Reply
    1. dodsonm20

      In an ideal world specialization and comparative advantage would lead to more trading. In addition, when we look at long term free trade is good for the economy and so it is something we should continue. In America we will likely never reach completely free trade because certain industries need tariffs and strict trade policy to remain competitive and therefore they will elect representatives who will help them achieve this.

      Reply
  2. ingramk20

    In response to Lee's question about running a trade deficit, the book mentions trade deficits and surpluses are an indication of investment spending and savings behavior. Ben Bernanke, once the governor of the Federal Reserve argued the U.S's current account deficit was the result of too much investment spending and not enough saving. The inflow of capital from poor countries Apparently helped fuel the housing bubble. So how can international capital flows be managed to stop major worldwide recessions? Is this something that could happen again if we behaved irresponsibly?

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    1. dodsonm20

      This is a good question. I think that better worldwide trade policy could lead to less recessions. It seems to be a hard task, though, since certain countries will always be worse off than others.

      Reply
  3. dugganj20

    It is interesting to see how the U.S. has shifted from an economy of equal exports and imports to one of primarily imports. This tells us that the U.S. economy is influenced largely by the production and productivity of other countries, as many of our goods are made internationally.

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    1. minsong20

      In the reading leading up to the midterm, we read about the costs of having a minimum wage. I think here we see one example of how we made the labor of other countries more economically viable.

      Reply
  4. Mariam Samuel

    Is this trade trend (falling before entering recession and rising towards the end) correlated in the economies of other countries of similar economies? If so, this could be a potential focus as a precursor to recessions in order to take precautions to lessen their effect and longevity. I'm also interested to see if this trend predated the shift away from balanced trade.

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    1. Faith E. Pinho

      I would imagine other countries have similar trends of beginning a recession with decreased trade and ending with rising trade. However, I would be surprised if decreasing trade causes recession -- instead, I imagine the recession causes decreasing trade. For instance, when the housing bubble burst in the U.S. in 2008, attention turned inward: the federal government initiated several domestic programs to boost the economy. Consequently, international trade decreased.

      Reply
    2. dodsonm20

      Our research was limited to the US because similar data in the same format for other countries was harder to come by but is definitely something looking into. In general I would assume that more developed countries tend to have similar issues as their economies begin to grow more and more slowly.

      Reply
      1. the prof

        Good to see you replying! In fact other countries do not show similar changes – our trade deficits are home grown, not a reflect of global trends. More later this term, to explain why I say "home grown" – we will ultimately return to our "circular flow" equation: (S-I) + (T-G) = (X-IM).

        Reply
  5. scottm20

    The undefined relationship between net exports and domestic GDP is highlighted between the two graphs, and makes for an interesting observation. During this shift from a balanced trading approach to a more globalized economy, exports and GDP share few behavioral characteristics. While exports dramatically decreased, GDP maintained its steady incline (granted with dips throughout). The concluding point made, that exports assist with understanding the economic climate but not in forecasting economic trends, can be furthered accentuated through the aggregate demand equation (AD = C + I + G + X - IM). When looking at the total anticipated expenditure in an economy, three other variables--consumer, investment, and government spending--contribute aside from exports (X) towards aggregate demand. This shows that while exports effect GDP, they do not necessarily set the pace for which economic growth is realized. -Griffin Scott

    Reply
  6. calihanj20

    I think an interesting addition to this piece would be to look at imports themselves and exports themselves leading up to the 2009 recession to see if the net exports are decreasing due to an increase in imports or a decrease in exports. My guess would be that exports were decreasing leading up to the recession and the net export rebound afterwards was due to decreased imports.

    Reply
  7. riversc20

    I was surprised by how little of GDP is comprised by net exports, therefore not really affecting GDP much. However, in the case of the US this is great because even though our net exports have been decreasing in previous decades our GDP has still been increasing. But, as you said, net exports create income and employment opportunities, which make them vital despite its lack of strong influence over GDP.

    Reply
  8. the prof

    This is something we'll return to on the Friday before Feb break, if only briefly.
    A data issue: focusing on the deficit hides that the overall economy has grown. In due course I'll show the FRED graph in class that looks at the trade deficit as a % of GDP, rather than as an absolute amount.

    Reply

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