Net Exports Formula
The net exports formula is simply value of exports once imports have been deducted:
Net Exports = Total value of exports - Total value of imports
The sum can, of course, be a negative in which case a country is said to have a deficit on its 'balance of trade', this is synonymous with a current account deficit, or simply a trade deficit. Any current account deficit will need to be offset by a surplus elsewhere in the overall national accounts, and this topic is discussed more fully in my article about the: Balance of Payments
Net exports are negative when consumers spend more on foreign goods & services than foreigners spend on domestically produced goods & services. There is no immediate cause for concern when this happens, but if a persistent trade deficit arises such as we have had in the US, the UK, and many other western countries for many decades, then it does become a problem. It can only be sustained by a persistent inflow of capital from foreign shores, and whilst this can be a good thing if that capital is used for investment in new or existing businesses, it is often the case that the inflow is used to buy government bonds i.e. to lend money to the government.
This has facilitated the truly enormous growth of our national debt, and at some point it will become a national catastrophe because our creditors will eventually want their money back. Our inability to pay them will come either with an outright default, or with spiraling inflation and a currency crisis. Either option will cause an economic collapse of staggering proportions. In a nutshell, the west has been living beyond its means for far too long.
How are net exports calculated?
The methods for calculating net exports is the same as for national income i.e. the income, output, and expenditure approaches as discussed in my article about: National Income Accounting
Marginal Propensity to Import (MPM)
Whilst government manipulation of interest rates, and other economic variables, does enable a possible role for Keynesian style demand management, it does not follow that the net exports effect is neutral if left to the free-market... at least not in the short-run.
Any deviation of the economy from its long-run growth path will somewhat distort the pattern of consumption expenditure. For example, if a boom period develops whereby people increase their consumption of goods & services beyond that which can be permanently sustained, then they will tend to increase their consumption of imported goods as well as domestically produced goods.
This will happen independently of the amount of exported goods that foreign consumers decide to purchase from us, with the end result that a trade deficit will develop. The extent to which this happens i.e., the propensity of domestic consumers to increase their consumption of imported goods as their expenditure/income increases, is known as the marginal propensity to import (MPM).
A higher MPM will likely exist for countries that import a large share of their luxury goods, because it is luxury goods that people want to increase their consumption of whenever economic circumstances allow it. If a country only imported basic items like rice, grain, pots and pans etc, then the MPM would be low because people would be more likely to increase their spending on things like smartphones, notebooks, concerts, expensive restaurants and so on.
A high MPM has a stabilizing effect on the economy because it reduces the net exports effect. Extra spending on imports represents a leakage from the national circular flow of income, and that helps to stop the consumption function from rising as fast as it otherwise would.
Net Export Effect on GDP
As mentioned at the top of the page, net exports is one of the components of aggregate demand that, along with aggregate supply, determines national income i.e. GDP. An increase in net exports can be illustrated as an upward shift of the Keynesian consumption function. This will lead to a higher level of GDP, and the extent to which GDP increases is determined by the size of the Keynesian multiplier effect (click the links for details).
This, of course, assumes that there is spare capacity in the economy to allow that growth, and that opens a whole new debate which cuts to the core of modern economics. Again, click the links for details on that.
In the developing world, economists have tried many different approaches to spurring poor countries into growth, and by far the most successful of these approaches has been the export led approach. The main alternative i.e., the import substitution model, has always failed.
All of the 'Asian tigers' succeeded in achieving rapid economic growth by following an export led strategy. The main advantage here is that it opens up the domestic economy and allows an inflow of international capital to invest in manufacturing plants that can then utilize the cheap labor in these poor countries. The opening up of the economy exposes it to international competition, and the efficiency which that necessitates spurs rapid growth in GDP.
All of the Asian tigers developed huge GDP boosts via the net exports effect, with huge trade surpluses that have allowed an accumulation of foreign assets to be built up. According to the UN, over a billion people have been lifted out of poverty since 1990, and this largely due to the export-led growth in China and elsewhere in the developing world.