When a country exports goods, it sells them to a foreign market, that is, to consumers, businesses, or governments in another country. Those exports bring money into the country, which increases the exporting nation's GDP. When a country imports goods, it buys them from foreign producers. The money spent on imports leaves the economy, and that decreases the importing nation's GDP.
Net exports can be either positive or negative. When exports are greater than imports, net exports are positive. When exports are lower than imports, net exports are negative. If a nation exports, say, $100 billion dollars worth of goods and imports $80 billion, it has net exports of $20 billion. That amount gets added to the country's GDP. If a nation exports $80 billion of goods and imports $100 billion, it has net exports of minus $20 billion, and that amount is subtracted from the nation's GDP.
Conceivably, net exports could be zero, with exports equal to imports and in fact this does occasionally happen in the United States.
If net exports are positive, the nation has a positive balance of trade. If they are negative, the nation has a negative trade balance. Virtually every nation in the world wants its economy to be bigger rather than smaller. That means that no nation wants a negative trade balance.
Protectionism refers to government policies designed to restrict imports from coming into the nation. A tariff, also called a duty, is a tax on imports as they come into the country. Free trade means international trade that is unrestricted by tariffs or other forms of protectionism.
Because no nation wants a negative trade balance, some countries try to protect their own markets. This policy, called (logically enough) protectionism, uses barriers to keep out imports. These barriers include high tariffs—taxes or surcharges on imported goods—and strict rules about what products can be imported.
Despite some nations' attempts at protectionism, free trade—trade unencumbered by barriers—has recently been the dominant trend for most countries. Economists usually favor free trade because it tends to give consumers the greatest choice of products at the lowest prices. That occurs because some nations are better at producing certain products than others.
Excerpted from The Complete Idiot's Guide to Economics © 2003 by Tom Gorman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.