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In my course notes, it says that "when net exports is negative it means that the country is borrowing from other countries" but I do not get it if net exports is negative that only means that exports < imports so net exports is negative, how does that relate to borrowing from other countries? or does it does assume that we traded our exports for imports instead of paying in cash?

Thanks in advance.

Edit : and I apologize if my question sounds stupid

Edit : the answer by @BB King on A country borrowing from the rest of the world did not help me , what i do not get exactly is how net exports component works and how it is calculated, ik that net exports = exports - imports and that we subtract imports for the fact that GDP is concerned only with domestically produced products so we subtract imports from consumption component (C-M) but we "rearrange" the formula of GDP and call (X-M) net exports (tho it's still the same formula), if i as citizen made some purchases online from other countries, that would be subtracted from GDP only cuz it's not domestically produced and if for some reason citizens of my country imported more than what they exported , XN becomes negative simply cuz of rearrangement of the formula so why does that mean my country owes other countries anything (citizens paid for everything out of their own pocket)?, what i am saying is that net exports component only exists cuz of the rearrangement of the formula so if NX is negative, it means M>X , except if X,M are calculated with something like X = imports + amount of money borrowed from other countries, M = Exports + amount of money lent to other countries (of course I made those up , to explain my point of view)

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  • $\begingroup$ @1muflon1 it does not clear up my confusion, why an importing country should be considered a borrowing country? they could have paid for these imports out of their savings? + why in a closed economy the total production should be equal to total consumption, suppliers do have inventories that could be used for extra consumption? if you could give a good reference that explains this point (an article or a video) that would be great $\endgroup$
    – AmirWG
    Feb 23, 2021 at 20:41
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    $\begingroup$ Then please edit your question with references to that older answer and it can be reopened. Regarding your question, in international econ dissaving is colloquially also called borrowing when it comes to balance of trade. Consumption does not need to equal production, just read the answer there carefully consumption cannot exceed production. Inventories are reported on national accounts as inventory investment in the year they are accrued. A good reference is Krugman et al International Economics Theory and Policy $\endgroup$
    – 1muflon1 ♦
    Feb 23, 2021 at 21:27
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    $\begingroup$ @AmirWG, if a country paid for net imports out of "savings", that would mean paying for the imports out of net foreign currency holdings, and they could only have accrued such currency by previously running a trade surplus (and the other country running a deficit). In that sense, the premise of the question is false - a trade deficit does not necessarily imply borrowing, as an alternative may be running down an existing credit - but a significant trade deficit is usually seen as a bad thing, because it implies that your economy is buying far more than it is capable of selling. (1/2) $\endgroup$
    – Steve
    Feb 23, 2021 at 21:45
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    $\begingroup$ Also, it must be apparent that production must equal consumption in the end, as what does not exist (for want of production) clearly cannot be consumed, and production of goods cannot long run significantly in excess of consumption without producing mountains of unsold goods, the storage of which has to be managed, and most of which will deteriorate if left unconsumed. And services often cannot be accumulated or stored at all - the labour can be performed only at the same time as the demand for it. (2/2) $\endgroup$
    – Steve
    Feb 23, 2021 at 21:51
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    $\begingroup$ I think it is fine now, I already reopened it $\endgroup$
    – 1muflon1 ♦
    Feb 23, 2021 at 23:25

1 Answer 1

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Maybe this will help: imagine that trade is done in the currency of the foreign country.

Suppose you are American, you are standing on the border of Mexico, and you sell a hot dog to a Mexican for 20 pesos. Now you want to buy tacos from him, but you want 30 pesos of tacos. So he lends you 10 pesos, then you buy the tacos.

So X=20, M=30, and net exports= -10
and you borrowed 10.

Side note: some poor, risky countries (e.g. North Korea) can't have negative net exports, because no one will lend to them.

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  • $\begingroup$ I get it now, thanks for the great answer! $\endgroup$
    – AmirWG
    Feb 26, 2021 at 21:02

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