In terms of foreign trade the United States can have a trade deficit, a trade surplus, or neither. Which scenario, ceteris paribus, results in the highest calculated U.S. aggregate demand? Which scenario, ceteris paribus, results in the lowest calculated U.S. aggregate demand? Explain your reasoning.

Question

What will be an ideal response?

Answer 1

Aggregate demand is calculated from C+I+G+(X-M), where (X-M) is net exports. In a trade surplus scenario, exports (X) are greater than imports (M), which means net exports is a positive value. With neither a trade surplus or a trade deficit the net exports equal zero. In a trade deficit scenario, imports are greater than exports which means net exports is a negative value. Under the ceteris paribus condition, C, I, and G are held constant. Thus, the addition of positive net exports (the trade surplus) provides the highest calculated U.S. aggregate demand of the three scenarios. The addition of negative net exports (the trade deficit) provides the lowest calculated U.S. aggregate demand of the three scenarios.