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What is the Balance of Trade?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 September 2016
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Also known as an international trade balance or simply a trade balance, a balance of trade is a term that is used to describe the relationship between the import of goods into a given nation and the products that the nation exports to other countries. The idea with a balance of trade is to reach a point where the difference between those exports and imports is at a level that is considered desirable in terms of the national economy. A balance of trade does not have to be in the form of an equal amount of exports when compared to imports. More often, the ideal economic condition for a given nation will require that one figure be slightly higher than the other.

It is important to note that the balance of trade is typically a major component in a nation’s overall balance of payments. This means that all sorts of transactions go into the assessment of that balance. A typical trade balance will allow for such debt items as the amount of domestic investments that are trading offshore, the amount of domestic spending that is taking place outside the nation, any foreign aid that is being provided to other countries, and all imported goods. The figure will also account for credit items such as foreign spending that is taking place within the nation, investments by foreign interests in domestic entities, financial aid received from other nations, and all exported goods.

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When the balance of trade indicates that a nation is importing more goods than it is exporting, this is usually known as a trade deficit, since more is coming in than going out. Situations in which a nation is exporting more goods that it is buying from other nations are known as a trade surplus. Depending on what is happening within the national economy, a surplus or a deficit may be desirable for the short term.

For example, a country that is attempting to emerge from a recession will often benefit from a situation where there are more exports than imports, effectively pouring more money into the nation and jump-starting the economy. By contrast, a period where there are more imports than exports can often be an effective tool when it comes to controlling the rate of inflation. Since economic conditions change over time, a trade deficit or a trade surplus may be an ideal situation for one economic period, but actually be a detriment to the stability of a national economy during the following period.

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burcidi
Post 3

I thought that the balance of trade did not include foreign investment and profits from tourism. So I was thinking that even if a country has a negative balance of trade, it can still be doing okay after accounting for these other profits. But I guess that's not the case.

That means that we can look at a country's balance of trade and know how its domestic economy is doing.

ddljohn
Post 2

@anamur-- such countries will be in a trade deficit if their exports don't keep up with their imports.

India has been in this position because they have a big growing population. So their imports keep increasing but their exports don't increase as much because their products can't compete with other countries'. They need to be able to make better quality and less expensive products to balance exports with imports.

It's not an easy thing to do if the Indian government is barely able to provide for domestic needs. It won't have the money to invest in better manufacturing. And I think this is what is happening.

serenesurface
Post 1

How can countries that don't have much commodity, natural resources and manufacturing capacity, actually maintain a favorable balance of trade?

If they only have raw commodities that cost less than exports no matter what, they will always be in a deficit right? Then they will have to borrow money from international organizations and other countries to keep the country running. Isn't there any international economic policies that make trade a more level and equal playing field?

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