What is the trade balance of a country?
What is the trade balance of a country?
Discover together the importance and extent of a country's trade balance. Let us study what are the trade balance positive and negative trade balance.
The balance of trade between countries is generated by foreign exchange and other international transactions, which are included in the balance of payments and trade balance of each country. The trade balance lists the flow of foreign currency, goods and services, economic claims, claims government, corporations or individuals.
The balance of payments is therefore to identify statistically all economic transactions between one country and other nations.
The trade balance is the difference between the values of exports and imports of goods and services over a given period (usually 3 months). It thus establishes a relationship between imports and exports of the country, and is expressed by the formula:
Measuring the trade balance = total exports of country X - total imports of country Y
The trade balance as the most important part of the balance of payments of a country. It can also be called "international trade balance" in this country.
A positive trade balance means that the country exports more goods and services than it imports: it is called a "trade surplus" or "balance surplus." Canada, Japan and Germany are examples of positive trade balance. They enjoy a stable economy and attractive savings rates.
A negative trade balance means that the country does not export enough: it is called "trade deficit". This concept should not necessarily be viewed negatively, but rather as a cyclical event related to the economic cycle. Countries with a strong growing economy such as USA, Hong Kong and Australia "collect" trade deficits. These countries have to cope with a huge domestic demand in these periods of economic expansion. A negative trade balance is more problematic in poor countries whose economies and growth are in the hands of foreign investors.
Countries export more during recessions, in order to stimulate demand and increase employment opportunities. In times of financial expansion, the rate of imports is directly linked to inflation.
In short, a trade deficit is not recommended during a recession, but can be an asset for a country in times of expansion.
Establish the extent of the trade balance is not an easy task because it involves some important collections of all the data in terms of imports and exports.
Here are several factors that may make it difficult to establish the extent of the trade balance: changes in exchange rates, trade agreements between countries, the economic cycle from a specific country (phases of recession or expansion) taxes which differ from one country to another, the differences in prices of products made in the country itself.
A balance of goods is sometimes used instead of the trade balance itself. It focuses only on transactions involving goods, not services. It is more accurate and easier to establish.
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