Balance of Trade
Balance of trade is defined as the difference between a country’s imports and exports over a period of time. It is the largest component of the balance of payments of any given country. When looking at balance of trade it is also important to note that the debit items of a country include foreign aid, imports, and domestic spending and investments abroad. The credit items on the other hand include exports, and foreign spending and investments in the domestic economy.
The balance of trade is one of the indicators of economy that most people do not really understand. It is important to note that balance of trade is measured in monetary value and also over a period of time. It can be said that the balance of trade is positive or favorable when the exports are more than the imports. This can also be referred to as trade surplus. A trade deficit is the name of the opposite; when the imports are more than the exports. At certain times, the balance of trade can be divided into a balance of goods and services.
The trade balance is similar to the difference that exists between a nation’s domestic demand and output. This can also be represented as the difference between the value of goods that a country produces and the ones that it purchases from abroad. However, it should be noted that this does not include money that is re-spent on foreign stock. Besides, it does not also include the cost of goods imported by a country with the aim of production for the local market.
At times, measuring the balance of trade can be a challenge based on the difficulty in data recording and collection. Despite this, those who are involved in doing the measurements are required to make sure that all the transactions include an equal debit or credit in the account of every country. There are several factors that can have an impact on the balance of trade and should be looked at very keenly when measuring it. These factors include:
- Cost of production in the exporting economy compared to that in the importing economy
- Exchange rates
- Restrictions on trade
- Cost and availability of inputs like raw materials among others
- Price of locally manufactured goods
- Availability of sufficient foreign exchange to be used for payment for imports
Contrary to what some may think, the balance of trade usually differs across business cycles. For instance, in a country where exports are more than imports, there will be an improvement on the balance of trade during expansion of the economy. On the other hand, a country that is characterized with high domestic or import demand will experience an unfavorable balance of trade when it gets to a similar stage in the business cycle. Apart from the monetary balance of trade, there is also the physical balance of trade that is expressed in terms of the amount of raw materials.
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