Question

Which of the following statements is correct?

A. An increase in exports will tend to increase, and an increase in imports will tend to decrease, the equilibrium GDP
B. An increase in exports and an increase in imports will both tend to increase the equilibrium GDP
C. An increase in exports and an increase in imports will both tend to decrease the equilibrium GDP
D. An increase in exports will tend to decrease, and an increase in imports will tend to increase, the equilibrium GDP

Answer 1

An increase in exports will increase the equilibrium GDP, whereas an increase in imports will decrease it. The net exports (exports minus imports) play a crucial role in determining a country's GDP, affecting economic growth and the aggregate demand curve.

Step-by-step explanation:

The correct statement regarding the impact of exports and imports on the equilibrium GDP is that an increase in exports will tend to increase the equilibrium GDP, while an increase in imports will tend to decrease it. This effect on the GDP is understood through the concept of net exports, which is calculated as the difference between a country's exports (X) and imports (M), represented by the formula (X - M). A positive net export value indicates a trade surplus and contributes positively to the GDP, while a negative net export value indicates a trade deficit and subtracts from the GDP.

For example, if the U.S. exports increase, it leads to a shift in the aggregate demand curve to the right, resulting in an increase in both the real GDP and the price level. Conversely, if U.S. exports fall, it results in a shift of the aggregate demand curve to the left, reducing the GDP and the price level.

The trade balance, and thus its impact on GDP, can have significant effects on the economy, influencing investment in industries and the allocation of workers, and consequently the nation's economic growth.