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AS Macroeconomics Edexcel Quick Question

Can someone explain how Greater Exports leads to Aggregate Demand to Increase?

Also what affect does imports have on Aggregate Demand (AD). Why does Reduced Imports and Rise in Exports mean AD increases (depreciation in currency)?

Doesn't Aggregate Demand mean, spending on goods on services so shouldnt imports rise Aggregate Demand since greater imports mean greater consumption?

(edited 7 years ago)

Reply 1

BirdIsWord

Just know the equation AD = Consumption + Gov spending + investment + (exports-imports)
I dont think you'd ever have to explain WHY it leads to an increase in AD.

Reply 2

The gains kinggg

Original post by TheProKi

C+I+G+(X-M)

Increase in exports will lead to an increase in AD^

And again look at the equation

And again

Reply 3

TheProKi

Original post by The gains kinggg

C+I+G+(X-M)

Increase in exports will lead to an increase in AD^

And again look at the equation

And again

Lol but why? Thats my question i know its in the equation but if i dont understand it how im i going to implement it into my answer?

Reply 4

TheProKi

Original post by BirdIsWord

Just know the equation AD = Consumption + Gov spending + investment + (exports-imports)
I dont think you'd ever have to explain WHY it leads to an increase in AD.

So we don't need to know why, are you 100% sure?

Reply 5

BirdIsWord

Original post by TheProKi

So we don't need to know why, are you 100% sure?

like 99% sure yes.
Thats just like saying Why does me receiving two apples increase the number of apples i have by two?

Reply 6

TheProKi

Original post by BirdIsWord

like 99% sure yes.
Thats just like saying Why does me receiving two apples increase the number of apples i have by two?

Lol thats not what im trying to say at all, im asking why does greater exports and reduced imports increase AD since AD is spending on goods and services so imports is like consumers spending on goods and services so shouldnt that increase AD not exports?

Reply 7

officialjaayjaay

Our economy is already in a current account deficit, if X is theoretically > M then the trade deficit improves,

Reply 8

officialjaayjaay

therefor making the UK more internationally competitive, therefor causing AD to shift to the right

I think what your looking for is this:
if the UK are more internationally competitive, they're output is gonna appreciate, as output appreciate AD shifts right

(edited 7 years ago)

Reply 9

Adams Gamertag

Original post by TheProKi

Aggregate demand is demand for domestic goods (key word being domestic), so exports are foreign countries buying 'our' goods, as a result money coming into the economy from abroad. Imports however involve 'us' buying goods and services from another country so our spending does not count as an injection into the domestic economy but the other country's. Does this answer your question?

Reply 10

TheProKi

Original post by Adams Gamertag

TENK YEW, finally ye that answers my questions thanks alot!

Reply 11

Navroop99

Original post by TheProKi

The equation is AD = C + I + G +(X-M). Hence, by exporting (x) more than importing (m) the value of net trade is greater. Therefore since a value of one of the components of AD has increased AD will then increase.

A depreciation of £ means that £ is weaker and so exchange rates fall from a UK residents perspective. Therefore what may have been £1=$2 is now £1=$1.5. Therefore it is now cheaper for Americans to import goods from Uk than previously. In addition it is now more expensive for UK residents to import from USA. Therefore firms would redirect their production to America due to demand from America. Therefore we export more than we import. As a result net trade worsens and so the depreciation of the £ would cause a rise in AD.