Final answer:
In a small open economy, net exports equate to the trade balance. Exports minus imports (X - M) defines the trade surplus or deficit, which reflects the country's savings in excess of investment.
Step-by-step explanation:
The goods market equilibrium condition for a small open economy, assuming zero net unilateral transfers and zero net factor payments, is that net exports equal the trade balance. This condition is derived from the fact that net exports are calculated as the difference between exports and imports, that is, exports (X) minus imports (M), or (X - M). A trade surplus occurs when a country's exports exceed its imports, and a trade deficit occurs when imports exceed exports. This concept is important in understanding the demand for domestically produced goods within a global economy.
When considering the overall economic equilibrium, we can also refer to the equation where savings (S) minus investment (I) is equal to net exports (X - M), which can also be represented as (S - I = X - M). This identity means that excess domestic saving over investment is reflected in a trade surplus, signifying that a country is exporting more than it is importing.