The trade balance, also called the balance of trade, is simply the difference between imports to and exports from a particular country in a particular time period. It roughly shows how reliant a country is on imported goods. The trade balance combines with other international economic figures to give a more accurate and detailed insight into a country's global financial standing.
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Calculate the total value of exports from the country and imports to the country during the relevant time period. The data for these calculations can come from sources such as company financial accounts, shipping details, filings made for import duty purposes and tax filings.
Calculate exports minus imports. The result is the trade balance, a figure that must be noted as positive or negative. Alternatively you can simply quote the figure for the difference between the two as a trade surplus (if exports exceed imports) or trade deficit (if imports exceed imports).
Compare the trade balance figure to GDP during the relevant time period. The ratio of trade balance to GDP may be a more useful way of assessing the trade balance than the raw figure, particularly when comparing trade balance figures over time.
Adjust the figure to take account of the net effects of international investment and aid to produce the current account. Adjust the figure again to add in the effects of the capital account, which is the net effect of changes during the time period in domestic firms owning foreign assets and foreign firms owning domestic assets (such as international takeovers). The current account and capital account combine to produce the balance of payments which shows, depending on whether it is positive or negative, whether the country is "paying its way" in the global economy.
Tips and warnings
- A positive or negative trade balance is not necessarily an inherently good or bad thing. Some economists argue that while a positive balance is good during a recession because the exports boost domestic production, a negative balance can be good during a period of economic growth because the imports help provide competition and keep inflation in check.
- Across the world as a whole, exports often appear to exceed imports by a small proportion, usually around one percent, something that doesn't make logical sense. The most likely explanation is that money laundering, smuggling and tax evasion mean some transactions may be recorded or reported as an export from one country, but not as an import in the other country. As a general rule, this disparity is less of a problem in more developed countries with tighter legal controls and better data collection.
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