Effect on Imports, Exports, and GDP
Recall the formula for gross domestic product (GDP), C + I + G + (Ex - Im). The expression (Ex - Im) equals net exports, which may be either positive or negative. If net exports are positive, the nation’s GDP increases. If they are negative, GDP decreases. All nations want their GDP to be higher rather than lower, so all nations want their net exports to be positive. (Of course it is not possible for all nations to have positive net exports, because one or more nations must import more than they export if the others export more than they import.)
Returning to our example of the United States and Mexico, here is the sequence of events I just described and the impact on trade and GDP:
• U.S. demand for Mexican ...