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Trade Balance? What is Trade Balance? The Trade Balance refers to the difference between exports of goods and services out of the country, and imports. Trade Balance is the largest component of a country’s current account in its balance of payments (BOP) accounts. A positive Trade Balance (surplus) indicates that exports are greater than imports. When imports exceed exports, the country experiences a trade deficit. Because foreign goods are usually purchased using foreign currency, trade deficits usually reflect currency leaking out of the country. Such currency outflows may lead to a natural depreciation, unless countered by comparable capital inflows. At a bare minimum, deficits fundamentally weigh down the value of the currency. In addition, the trade balance is likely to differ across the business cycle. In export-led growth (such as oil and early industrial goods), the balance of trade will improve during an economic expansion. However, with domestic demand led growth (as in the United States and Australia) the trade balance will worsen at the same stage in the business cycle. Economies such as Canada, Japan, and Germany which have savings surpluses, typically run trade surpluses. China, a high growth economy, has tended to run trade surpluses. A higher savings rate generally corresponds to a trade surplus. Correspondingly, the U.S. with its lower savings rate 40 - 41
has tended to run high trade deficits, especially with Asian nations. Factors that can affect the trade balance include: 1-The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting economy vis-Ă -vis those in the importing economy 2-Exchange rate movements 3-The cost and availability of raw materials, intermediate goods and other inputs 4-Multilateral, bilateral and unilateral taxes or restrictions on trade 5-Non-tariff barriers such as environmental, health or safety standards 6-The availability of adequate foreign exchange with which to pay for imports 7-Prices of goods manufactured at home (influenced by the responsiveness of supply) Source: Wikipedia, Investopedia & Global Research