To understand how capital and goods flow in and out of countries, we should keep the Y = C + I + G + NX identity in mind. NX is of particular interest. NX is defined as the total amount of exports less the total amount of imports. NX is positive if a country exports more than it imports, negative if a country imports more than it exports, and zero if exports and imports are equal. Let's work through each of these examples in turn. First we'll examine the simplest case, in which exports and imports are equal. In this example, there are two countries, Country A and Country B. If Country A exports 1 million dollars worth of coconuts to Country B and imports 1 million dollars worth of bananas from Country B, then the NX for both countries is equal to zero since exports equal imports. In this case, goods are traded for goods and at the end of the term, the trade balance is equal.
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.