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Deconstructing the GDP - Net Exports

In the equation constructing the GDP ( Y = C + I + G + NX ), the "NX" stands for net exports. When domestically produced products are sold in other countries, those products are classed as exports. When a consumer in the U.S. buys a product produced in another country, those products are classed as imports. To obtain the net export number you merely total up exports, total up imports and subtract your import total from your export total. "NX" is that figure.

Why do we have to subtract imports? GDP is a total of how many dollars were spent inside the border on products made inside the border. Most of this consumption is by locals (U.S. citizens) but non-U.S. citizens buy these goods too. In fact a LOT is sold to non U.S. citizens. Think of Coca-Cola for example. It is hugely popular outside the U.S. as are Marlboro cigarettes.

Products that are exported are referred to as "EX". Adding this level of factoring also makes it possible to break out figures like how much U.S. citizens themselves spent on products produced within the U.S. border ( and obviously economists love nothing more than a buffet of numbers ).

Total expenditures on on ALL goods and services is "C" (see Consumption).

If you want to get the part that is spent only on domestically made items you need to subtract the value of imports (IM) from consumption (C) which is expressed as...
C - IM

Therefore our GDP equation can be written as follows...
Y = C + I + G + EX - IM

The advantage of expressing GDP in this manner is that EX - IM quickly shows a country's trade imbalance. When EX - IM > 0 more is being exported than imported. Conversely when EX - IM < 0 more is being imported than exported.

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This page contains a single entry from the blog posted on December 21, 2008 11:52 AM.

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