Balance of Trade
What is Balance of Trade?
Trade balance or currency flow between countries is generated from international trades and other major international transactions. Each of the above transactions is recorded in the balance of payments and balance of trade record of each country. Trading balance may include the flow of currency, goods and services, economic claims, gifts and claims traded by governments, firms or individuals.
The balance of payments acts thus as a statistical record of all economic transactions between the nation of one country with the nations of other countries.
Balance of Trade (BOT) is term given for the difference between the total imports and the total exports of a specific country over a set period of time (usually a quarter or a year). This balancing trade figure indicates the relationship between nations’ total imports and nations total exports.
Balancing trade can be expressed by the following equation:
BOT = Total exports of Country X – Total imports of Country X
The trading balance forms the largest segment of any country’s balance of payments. BOT can also be referred to the “"international trade balance" of that country.
A trade surplus occurs when the balance of trade is a positive figure. This means that the country in question relies more on exporting than on importing. Examples of countries with trade surpluses are Canada, Japan and Germany. These countries have mature stagnant economies and also enjoy higher savings rates.
A trade deficit (also referred to as a “trade gap”) occurs when the balance of trade is a negative number. This suggests that there is a shortage of exports in that country.
A trade deficit is not always perceived as a negative idea, but more as a cyclic event viewed in relation to the cycle of the economy. Strong growing economic countries such as the USA, Hong Kong and Australia repeating run trade deficits. This is due to their huge domestic demand during times of economic expansion. Trade deficits are true for poorer growing economies where growth is driven by consistent foreign investments.
Countries export more during recession periods in order to increase demand and jobs. In times of financial expansion, imports are strongly relied on to curb inflation. From the above it can be seen that a trade deficit is not preferred during times of recession, but may help during times of expansion.
The inherent problem with determining an accurate balance of trade figure is the problems associated with recording and collecting all import and export data.
Elements that can affect the accuracy of balance of trade figures include:
- Exchange rate deviations
- Trade Agreements between different countries
- Business cycle of specific country (recession or expansion phase)
- Taxes and tariffs of different countries
- Differences in prices of goods produced at home.
A Merchandise balance is sometimes used instead of the trade balance. The merchandise balance only concentrates on trades in goods (not services). The above is used as the data from trades in goods are more available and accurate.