The Net Export Effect on an Expanding Economy

The net export effect refers to a change in collective expenditures on actual production, particularly net exports through the foreign segment. The change results due to a change in the price level thereby altering the comparative prices of imports and exports. On the other hand, balance of payments is the difference in value in a certain period of time involving a nation's exports and imports of goods and services. According to Blaug, when a county’s economy is expanding, its exports are bound to exceed imports which leads to a favorable balance of trade and a situation referred to as trade surplus.

A major player in this is the state of a country's export/import market. The fluctuations in the currencies founded on the import/export market make the value of the dollar to experience cycles. When the economy is expanding, the value of the dollar is strong making it desirable for imports.  However, as the dollars steadily become scarce, a country’s currency weakens. However, American exports are good when the dollar is weaker, but this will finally see the currency’s decrease and the dollar go up. The success secret behind politicians and economists is to guarantee that a country’s currency and interest rate fluctuations are not too common or stern in any of the direction.

A country’s interest rate depends on the rate at which its base currency fluctuates.  The basis under which a currency fluctuates is dependent on the availability of the currency in the market. During a flexible rate situation, a country’s currency is tagged onto the dollar at a variable rate. On the other hand, in the case of a fixed exchange rate situation a country tags it currency to the dollar at a fixed rate. In either of the cases, the value is attached below the existing market value.  A country experiencing an expanding economy may achieve this by not freely trading the local currency. In return, this guarantees that the dollar remains unnaturally high therefore rendering imports to be uncompetitive in the domestic market.