What is a Trade Balance?

Published by Thomas Herold in Accounting, Economics, Trading

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

Trade balances are used to describe the difference between the value of goods and services that are exported versus those that are imported into a country. Countries might have positive trade balances, where they export a greater value than they import. They might also have negative trade balances, or trade deficits, when they import a larger value of goods and services than they export.

Positive trade balances create cash stockpiles and investment surpluses. Nations like Singapore, South Korea, Taiwan, and most of the Gulf Oil states like Saudi Arabia, Kuwait, and the United Arab Emirates continuously run positive trade balances. Negative trade balances create currency outflows or government debt that must be issued and sold domestically or exported as payment for the extra imports. Countries like the United States and Great Britain commonly run negative trade balances.

Positive trade balances are beneficial and constructive to a nation. They can be run forever in theory, so long as other countries continue to purchase their goods and services at high levels. Negative trade balances, or trade deficits, are harmful to a country over long periods of time. They can not be carried on forever, since eventually the negative trade balance running countries will reach a point that they have spent all of their money covering the imports or issued an amount of debt that finally becomes unsustainable and undesirable to investors any longer.

The United States’ trade balance specifically refers to the differences between the value of American goods and service exports versus goods and services imported into the United States. This trade balance proves to be among the largest Balance of Payment components. America’s Balance of Payments is constantly pressuring the U.S. dollar’s value. These deficits minimally bring down the value of the currency for a country that continuously runs them.

Trade balances are reported in the United States and other advanced economies. The problem with such reports is they commonly come out some time after the data is current. This means that most of the information contained within such trade balance reports has already been anticipated and affected the markets. The Foreign Exchange markets do move based on these trade balance reports though, since trade balance data helps to form or support foreign currency trends. To this FOREX market, the Trade Balance report has proven historically to be among the most significant released from the United States.

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