Net Exports: Why They Matter and What Drives Them

The net exports of a country measure the value of its total exports less the value of its total imports. This indicator is positive if exports are larger in value than imports, otherwise it’s negative. Net exports go into calculating the GDP (gross domestic product) of a geography. As a result, if a country imports more than it exports, the excess value of imports reduces from its economic output.

The nature of an economy and its businesses make it either export or import-oriented. It also determines how changes in net exports impact the economy. For instance, Japan is an export-oriented economy. A fall in exports would have a much more severe impact on it than a country that’s more neutral in terms of its trade. In contrast, India is an import-oriented economy. As a result, a rise in exports would provide the country’s economic output with a much bigger rise than it would to a more export-import neutral country.

Two major factors contribute to determining net exports:

• the situation of the world economy
• the state of the nation’s currency against the US dollar

If the global economy is weak—people are out of jobs and people with jobs are trying to hang on by either giving up higher wages or even accepting lower wages—the demand for products would diminish. This would impact that country’s trading partners. For instance, Mexico is a large export destination for goods that are made in the US. If the Mexican economy lost steam, it would impact US exports. As a result, major trading partners’ economic health is crucial for an economy’s exports.

Let’s look at the US again. The US dollar has strengthened quite a bit. This is evident in the above graph. A strong dollar (UUP) has a negative impact on exports. It makes dollar-denominated items more expensive in the international market. This hurts the overseas revenue for exporters like ExxonMobil (XOM), Honeywell International (HON), Colgate-Palmolive (CL), and Oracle (ORCL). Also, imports become cheap and consumers begin demanding those goods over domestic ones.

This indicator is crucial for economies that either depend on imports or rely on exports.

Although there are several other indicators like those on housing, consumer sentiment, among others that are important to track, they may not be available for all countries. This makes the five indicators that we discussed in this series crucial to track whenever an investor wants to diversify investments to a different geography or re-allocate investments.

Market Realist’s Macro ETF Analysis page will keep you updated with global developments and how they impact your investment.