Balance of Trade - Explained
What is a Balance of Trade?
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Table of ContentsWhat is the Balance of Trade?How does the Balance of Trade Work?Academic Research on Balance of Trade
What is the Balance of Trade?
The balance of trade (BOT) is the difference between the value of a nation's imports and exports at a certain period. It is by far the most significant component of any country's balance of payments. The BOT is used by economists to measure the relative strength of the economy of a nation. It is also known as trade balance or the international trade balance.
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How does the Balance of Trade Work?
A country whose value of imports in terms of goods and services is more than its exports has a trade deficit. A country that has a higher value of exports than imports has a trade surplus. The formula for calculating BOT is simple and is put as the total value of imports less the total value of exports. For example, let's assume that in a particular year, the total value of goods imported by the US was $1.5 trillion and those exported had a value of $1 trillion. The US therefore in that year had a trade deficit of $500 billion. $1.5 trillion in imports - $1 trillion in exports = $500 billion trade deficit A country with a large trade deficit has to borrow money to pay for its goods and services while the one having a significant trade surplus lends money to the trade deficit countries. Sometimes, the trade balance is a reflection of the prevailing economic and political stability in a country since it is based on the foreign investment in that particular country. Some of the debit items in the BOT include imports, foreign aid as well as domestic spending and investments abroad. The credit items are made up of exports, and foreign expenditure and investment in the domestic economy. By subtracting the credit items from the debit ones, the trade deficit or surplus of a certain country at a particular period is realized. Some countries are almost ascertained of having a trade deficit or surplus. The US, for example, has been having a trade deficit since 1976 due to its dependency on oil imports and other consumer products. China, on the other hand, produces and exports most of the goods consumed in the world and has recorded a trade surplus since 1995. However, The BOT is not always a viable indicator of the health of an economy. For example, in a recession, a country may prefer to export more to create more jobs and demand in the economy. In an economic expansion, the country may opt to promote price competition to limit inflation through importing more. The countries with the most significant trade surpluses in 2017 by current account balance were Germany, Japan, China, and South Korea while those with the most significant trade deficits were The US, UK, Canada, and Turkey.