Balance of Trade

Balance of trade is also known as net export, trade balance, or international trade balance. Also, it is considered as a part of the current account. It is usually a difference between the country’s exports and imports of goods for a given period of time.

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BOT – Balance of Trade

In this, imports and exports of services are not included. The services include invisible items like insurance, banking, interest, dividends on assets, profits, software services, etc. These items are termed as invisible because you cannot see them in cross border trades.

Based on the definition of BOT, the total value of exports – the total value of imports = Balance of trade. It is considered as the largest component of the country’s BOP. Also, this helps in determining the relative strength of the country’s economy.

When the value of imports is more than its exports, than for a country this is considered as the unfavorable balance of trade. Also, this can be termed as a trade deficit. Also, if the value of exports is more than the value of its imports than it is called a positive or favorable BOT for a country. This is called a trade surplus.

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Calculating the Balance of Trade

Suppose India exports $1.5 billion of goods and services in 2018. Also, in the same year, they exported $1 billion worth of good and services to other countries. So, India is said to have a trade balance of -$500 million of trade deficit.

In theory, the country that has a large trade deficit borrows money to pay for the goods and services. Also, the country that has a large trade surplus lends money to the countries that require money.

There are many cases where the trade balance is a correlation to a company’s economic and political stability. This is because it reflects the total amount of foreign investment in a country. Debit items in a country include foreign aid, imports, domestic investment and domestic spending abroad.

While credit items include foreign spending in the domestic economy, exports, and foreign investments in the domestic economy.

When an economy subtracts credit items from debit items, economists arrive at trade surplus or trade deficit. This can over a period of a month, quarter, or a year.

A trade deficit or a trade surplus is not always a viable indicator of a country’s health. Also, it must be considered in the context of other economic indicators like the business cycle, etc. For example, during a recession, a country prefers to export more and import less. Also, this is done to boost the demand in the economy and create jobs.

While in the times of expansion of the economy, countries would rather prefer to import more than export. This is to limit inflation by promoting competition in prices. It was noted that in 2017, Japan, China, and Germany has a huge trade surplus. While the large trade deficits were held by the United Kingdom, the United States, Turkey, and Canada.

Practice Questions on Balance of Trade

Q. Which of the following factors are considered as the invisible amount in the balance of trade of the country?

A. Remittance paid for workers’income

B. International trade for services

C. Income associated with nonresident liabilities and assets

D. All of the above

Answer: D. All of the above