Net exports significantly influence the Aggregate Demand (AD) curve, causing it to shift either to the right (indicating an increase in net exports) or to the left (indicating a decrease in net exports).

Net exports represent the difference between a country’s exports and imports and are a crucial component of aggregate demand. Aggregate demand is defined as the total demand for goods and services within an economy at a specific overall price level during a given time period. It can be expressed with the formula:

Here, $C$ stands for consumption, $I$ for investment, $G$ for government spending, and $(X - M)$ represents net exports. Consequently, any change in net exports will directly impact the AD curve.

When a country’s net exports increase, it indicates that the country is exporting more than it is importing. Several factors could contribute to this increase, such as a depreciation of the country’s currency, which makes its goods more affordable for foreign buyers, or a rise in global demand for the country’s products. An increase in net exports raises aggregate demand, leading to a rightward shift in the AD curve.

On the other hand, when a country’s net exports decline, it means that it is importing more than it is exporting. This decrease could result from various factors, including an appreciation of the country’s currency, making its goods more expensive for foreign buyers, or a drop in global demand for its products. A decrease in net exports results in lower aggregate demand, causing the AD curve to shift to the left.

In summary, net exports play a vital role in determining the position of the AD curve. Fluctuations in net exports—whether positive or negative—lead to shifts in the AD curve, which can have significant repercussions for the overall economy. For instance, a rightward shift in the AD curve due to an increase in net exports may spur economic growth and potentially lead to inflation. Conversely, a leftward shift resulting from a decrease in net exports could trigger economic contraction and potentially deflation.