Balance of Trade - Explained
What is a Balance of Trade?
Written by Jason Gordon
Updated at June 27th, 2021
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Table of Contents
What is the Balance of Trade?How does the Balance of Trade Work?Academic Research on Balance of TradeWhat 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.
Academic Research on Balance of Trade
- The balance of trade between disciplines: do we effectively manage knowledge?, Lockett, A., & McWilliams, A. (2005). Journal of Management Inquiry, 14(2), 139-150. This study examines the proposition by professor Hambrick that the field does not matter' through assessing the citation patterns between journals in the social sciences and management journals.
- Foreign exchange rate reform, the balance of trade and economic growth: an empirical analysis for China, Zhang, Z. (1999). Journal of Economic Development, 24(2), 143-62. This paper investigates the foreign exchange reforms of China and assesses the impacts that its currency devaluation has on the balance of trade.
- China's exchange rate reform and its impact on the balance of trade and domestic inflation, Zhang, Z. (1999). The Asia Pacific Journal of Economics & Business, 3(2), 4. This paper examines whether the economic reform of China has improved the sensitivity of the economic system and made it more responsive to market signals to allow exchange rate changes influence the trade balance in the long run.
- The real exchange rate and the balance of trade in US tourism, Cheng, K. M., Kim, H., & Thompson, H. (2013). International Review of Economics & Finance, 25, 122-128. This paper investigates the real exchange rate and income on US tourism export revenue and import spending using quarterly data from the 1973 to 2010 floating exchange period.
- Causal relationship between macro-economic indicators and stock exchange prices in Pakistan, Ali, I., Rehman, K. U., Yilmaz, A. K., Khan, M. A., & Afzal, H. (2010). African Journal of Business Management, 4(3), 312-319. This study employs the use of a set of macro-economic indicators not previously used by researchers in Pakistan to examine the causal relationship existing between the macro-economic indicators and stock market prices in the country.
- Is public information really irrelevant in explaining asset returns?, Edmonds Jr, R. G., & Kutan, A. M. (2002). Economics Letters, 76(2), 223-229. This paper attempts to find out whether public information affects the market by using a disaggregated procedure which notes the impact of each announcement on Nikkei returns.
- Macroeconomic news announcements and the role of expectations: evidence for US bond, stock and foreign exchange markets, Kim, S. J., McKenzie, M. D., & Faff, R. W. (2004). Journal of Multinational Financial Management, 14(3), 217-232. This paper investigates the impacts of scheduled government announcements which relate to six different macroeconomic variables on the risk and return of three main US financial markets.
- The scholarly exchange of knowledge in operations management, Linderman, K., & Chandrasekaran, A. (2010). Journal of Operations Management, 28(4), 357-366. This article investigates the exchange of ideas within the Operations Management journals and between other management disciplines in the last ten years.
- The US economy from 1992 to 1998: results from a detailed CGE model, Dixon, P. B., & Rimmer, M. T. (2004). Economic Record, 80, S13-S23. This paper presents a description of the historical and decomposition simulations undertaken from 1992-98 with a 500-sector computable general equilibrium model of the US.
- Changes in technology and preferences: a general equilibrium explanation of rapid growth in trade, Dixon, P. B., Menon, J., & Rimmer, M. T. (2000). Australian Economic Papers, 39(1), 33-55. This article explains the recent rapid growth in Australia's trade, and mostly intra-industry trade, by using a computable general equilibrium model.