What is Balance of Trade?

Published by Thomas Herold in Accounting, Trading

'Balance of Trade' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Balance of Trade refers to a nation’s difference between the value of its exports and imports in a particular time frame. It also represents the biggest part of the nation’s BOP balance of payments. Economists often utilize the BOT as their statistical tool for grasping the comparative strength of any national economy against another national economy. It also helps them to effectively understand the bigger picture trade flow between different countries. Other names for the BOT are the International Trade Balance and simply the Trade Balance.

Those countries (like the United States) whose imports of goods and services are larger than their exports possess what is called a trade deficit. On the other extreme, those nations (like Germany) which export far more goods and services than they actually import in return possess a trade surplus. It is entirely possible to figure up the Balance of Trade in a simplified format of imports minus exports. The true calculation is made up of a few different items though. In order for the number to make any meaningful sense, the trade deficit or alternatively surplus raw number has to be measured up against the GDP gross domestic product of the nation. This is because bigger economies are better prepared to absorb and handle larger amounts of surpluses or deficits.

There are many debit ledger items in this formula. These include foreign aid, imports, overseas domestic spending, and overseas domestic investments. On the credit side of the ledger are foreign spending within the domestic economy, exports, and foreign investments made within the domestic economy. When analysts subtract out the credit ledger items off of the debit ledger items, they come to the appropriate trade surplus or trade deficit on the nation in question during the time frame of year, quarter, or month.

In some countries, one can almost assume that they will have a trade deficit. The U.S. is a prime example of this. It has experienced a large trade deficit since 1976. This is largely due to its continued reliance on expensive oil imports as well as its insatiable lust for foreign consumer goods. At the same time, China the nation which produces and then exports a plurality of the consumer goods in the world has boasted a comfortable trade surplus since the year 1995.

By itself, such deficits or trade surpluses do not mean that an economy is doing well or poorly. Such numbers have to be viewed relative to the various economic indicators of the business cycle. Countries will likely export more in recessions in order to stimulate demand for the economy and to develop additional jobs. During powerful expansions, nations usually import larger amounts of goods and services which help to induce price competition to limit the ravaging effects of inflation.

For the year 2015, Germany, The EU as a whole, Japan, and China all enjoyed enormous trade surpluses at the same time as the United Kingdom, the United States, Australia, Canada, and Brazil had the biggest trade deficits.

Nations attempt to develop trade policies to foster a potential trade surplus. This is because favorable trade balances enable nations to amass profits on a national scale. It is always preferable to bring in a higher level of capital and to sell more goods. This equates to a greater standard of living. National firms also obtain competitive advantages of expertise when they produce large amounts of good for export. They are able to bring on more staff, generate higher levels of income, pay out higher dividends to their national investors, and to lower the unemployment level in consequence.

This explains why political leaders will often stoop to trade protectionist policies to encourage a trade surplus with other key trading partners. They do this through assessing quotas, tariffs, and putting subsidies on their imports.

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The term 'Balance of Trade' is included in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.