Balance of trade is the difference between the value of a country’s imports and exports for a given period. The balance of trade is the largest component of a country’s balance of payments. Economists use the BOT to measure the relative strength of a country’s economy. The balance of trade is also referred to as the trade balance or the international trade balance.
Understanding Balance of Trade (BOT)
A country that imports more goods and services than it exports in terms of value has a trade deficit. Conversely, a country that exports more goods and services than it imports has a trade surplus. The formula for calculating the BOT can be simplified as the total value of imports minus the total value of exports.
Calculating a Country’s BOT
For example, if the United States imported $1.5 trillion in goods and services in 2017, but exported only $1 trillion in goods and services to other countries, then the United States had a trade balance of -$500 billion, or a $500 billion trade deficit.
$1.5 trillion in imports – $1 trillion in exports = $500 billion trade deficit
In effect, a country with a large trade deficit borrows money to pay for its goods and services, while a country with a large trade surplus lends money to deficit countries. In some cases, the trade balance may correlate to a country’s political and economic stability because it reflects the amount of foreign investment in that country.
Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy. By subtracting the credit items from the debit items, economists arrive at a trade deficit or trade surplus for a given country over the period of a month, quarter or year.
Examples of Balance of Trade
There are countries where it is almost certain that a trade deficit will occur. For example, the United States has had a trade deficit since 1976 because of its dependency on oil imports and consumer products. Conversely, China, a country that produces and exports many of the world’s consumable goods, has recorded a trade surplus since 1995.
A trade surplus or deficit is not always a viable indicator of an economy’s health, and it must be considered in the context of the business cycle and other economic indicators. For example, in a recession, countries prefer to export more to create jobs and demand in the economy. In times of economic expansion, countries prefer to import more to promote price competition, which limits inflation.
In 2017, Germany, Japan, China, and South Korea had the largest trade surpluses by current account balance. The United States, the United Kingdom, Canada, and Turkey had the largest trade deficits.
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