Balance of Trade

What is Balance of Trade? 

• The difference between the value of goods and services exported out of a country and the value of goods and services imported into the country is known as Balance of Trade or Trade Balance.

• In today’s world, all countries import some goods and services from other countries, and they also export certain other goods and services which are surplus in their country. If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it exports more than it imports.

Balance of Trade Calculation

B.O.T = Net Earning on Exports - Net Payment made for Imports

Favorable & Unfavorable Balance of Trade (Surplus & Deficit)

The balance is said to be "favorable surplus" when the value of the exports exceeded that of  the imports, and "unfavorable deficit" when the value of the imports exceeded that of the exports. The balance of trade is the official term for net exports that makes up the balance of payments.

A balance of trade surplus is most favorable to domestic producers responsible for the 

exports. However, this is also likely to be unfavorable to domestic consumers of the exports who pay higher prices. Alternatively, a balance of trade deficit is most unfavorable to domestic producers in competition with the imports, but it can also be favorable to domestic consumers of the exports who pay lower prices.

Factors affecting the Balance of Trade

Factors that affect the Balance of Trade are as follows - 

• The cost of Production (Land, Labor, Capitals, Taxes, Incentives) in the exporting economy vis-a-vis those in the importing economy.

• The cost of availability of Raw materials, Intermediate goods and other inputs.

• Exchange Rate Movements.

• Different levels of Taxes or restrictions on trade.

• External or unavoidable factors like environmental, health or safety standards.

• The availability of adequate foreign exchange with which to pay for the imports.

• Price of goods manufactured at home in response to supply.

Why Trade Balance Matters - 

• The Trade balance is used to help economists and analysts understand the strength of a country's economy in relation to other countries.

• A country with a large trade deficit is essentially borrowing money to purchase goods and services, and a country with a large trade surplus is essentially lending money to deficit countries. In some cases, the trade balance correlates with the country's political stability because it is indicative of the level of foreign investment occurring there.