Net Exports, Capital Flows and Trade Balance

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  • 0:01 Net Exports
  • 1:06 Capital Flows
  • 3:07 Trade Balance
  • 5:32 Lesson Summary
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Lesson Transcript
Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Learn what net exports and balance of trade are, how they are calculated, and what influences them. Explore what capital flows are in relation to net exports and trade balance and the importance of these monies in an economy.

Net Exports

It's hard to watch or listen to financial, economic, or political programs and not hear words like trade balance, capital flow, or net exports. Although these areas can become fairly complex at times, this lesson will help you breakdown and clarify these basic concepts.

Net exports is the value of a country's total exports minus the value of its total imports. To go a little further, it is the amount by which foreign spending on a home country's goods and services exceeds the home country's spending on foreign goods and services. For example, if foreign countries purchase $500 billion worth of U.S. goods and Americans buy $400 billion worth of foreign goods in a specific year, net exports would be positive by $100 billion. The income and economy of foreign countries, tariffs and quotas, the political environment, and exchange rates are just a few things that can influence net exports.

Capital Flows

So, where do capital flows enter into the discussion with net exports and trade balance? At the most basic level, when someone imports a good or service, the buyer (or importer) gives the seller (or exporter) a monetary payment, just as we do when we go the store and purchase milk and bread. This payment is referred to as capital flows and represents money sent from overseas in order to pay for foreign goods and invest in markets. It is the movement of money among corporations and governments that go in and out of countries. The capital flow of a country can be either positive or negative based on their import and export levels, economic and political stability, and financial markets.

A positive capital flow balance implies that investments and money coming into a country from foreign countries exceeds the investments that are leaving that country for foreign sources. When inflows are greater than outflows, demand for more of the country's currency causes the currency to increase in value. This happens because foreign investors must change their currency into domestic currency when purchasing imports or investing in another country.

Strong capital flows into a country can result in many benefits. As firms and people invest new capital from outside countries, this can lead to new factories, research and development advances, and technology improvements. Ultimately, this results in more jobs, increased income, lower prices, and higher standards of living for citizens. One risk of too much capital inflow is that inflation could result if a country is already operating at full capacity and continues to receive strong foreign investment.

Now, let's look at trade balance and how it ties in and relates to capital flows and net exports.

Trade Balance

Trade balance, also commonly called balance of trade, is the official measurement term used and synonymous with net exports. Trade balance is simply the value of goods and services exported out of a country minus the goods and services imported into a country: (exports - imports). This relationship between exports and imports can be both positive and negative. The trade balance is referred to as positive, favorable, or surplus when exports exceed imports. It is referred to as negative, unfavorable, or deficit when imports are greater than exports.

Whether a country has a trade surplus (favorable) or trade deficit (unfavorable) can be influenced by many things that make it easy or difficult to import or export to various countries. A few of them are the following:

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