Question

Part 3: Explain the impact of an increase in net exports on real GDP, assuming the economy is operating below its potential output. Explain why it is difficult for a country to boost its net exports by increasing its tariffs during a global recession.

Answer 1

Like consumption and investment, exports create domestic production, income, and employment for a nation. Although U.S. goods and services produced for export are sent abroad, foreign spending on those goods and services increases production and creates jobs and incomes in the United States. This implies that an increase in net exports results in an increase in aggregate expenditures and an increase in real GDP. However, the use of tariffs to accomplish this goal (boost NET exports) will likely fail because other countries will respond in-kind. That is, if the United States increased tariffs to reduce imports (boost net exports) foreign countries will respond with tariffs on U.S. goods reducing exports from the U.S. (decrease in net exports)