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Exports are the goods and services produced in one country and purchased by residents of another country. Combined, they make up a country’s trade balance. When the country exports more than it imports, it has a trade surplus. When it imports more than it exports, it has a trade deficit.
Kenya’s chief exports are horticultural products and tea. In 2005, the combined value of these commodities was US$1,150 million, about 10 times the value of Kenya’s third most valuable export, coffee. Kenya’s other significant exports are petroleum products, sold to near neighbours, fish, cement, pyrethrum, and sisal.
History of International Trade
Any time you walk into a super market and pick up any stuff like a knife or a toy and chances are that the item has been manufactured in China or assembled in Mexico. Pick up coffee pods and you will see that they have been imported from Africa. When you shop for clothes, it is quite likely that you will see Made In China label.
We all know that international trade has been in vogue for centuries and all civilizations carried on trade with other parts of the world. The need for trading exists due to the variations in availability of resources and comparative advantage. In the present context where technology and innovation in all fields have thrown open borders to globalization, no country can afford to remain isolated and be self-sufficient.
International trade has a rich history starting with barter system being replaced by Mercantilism in the 16th and 17th Centuries. The 18th Century saw the shift towards liberalism. It was in this period that Adam Smith, the father of Economics wrote the famous book The Wealth of Nations in 1776 where in he defined the importance of specialization in production and brought International trade under the said scope. David Ricardo developed the Comparative advantage principle, which stands true even today.
All these economic thoughts and principles have influenced the international trade policies of each country. Though in the last few centuries, countries have entered into several pacts to move towards free trade where the countries do not impose tariffs in terms of import duties and allow trading of goods and services to go on freely.
The 19th century beginning saw the move towards professionalism, which petered down by end of the century. Around 1913, the countries in the west say extensive move towards economic liberty where in quantitative restrictions were done away with and customs duties were reduced across countries. All currencies were freely convertible into Gold, which was the international monetary currency of exchange. Establishing business anywhere and finding employment was easy and one can say that trade was really free between countries around this period.
The First World War changed the entire course of the world trade and countries built walls around themselves with wartime controls. Post world war, as many as five years went into dismantling of the wartime measures and getting back trade to normalcy. But then the economic recession in 1920 changed the balance of world trade again and many countries saw change of fortunes due to fluctuation of their currencies and depreciation creating economic pressures on various Governments to adopt protective mechanisms by adopting to raise customs duties and tariffs.
The need to reduce the pressures of economic conditions and ease international trade between countries gave rise to the World Economic Conference in May 1927 organized by League of Nations where in the most important industrial countries participated and led to drawing up of Multilateral Trade Agreement. This was later followed with General Agreement of Tariffs and Trade (GATT) in 1947.
However once again depression struck in 1930s disrupting the economies in all countries leading to rise in import duties to be able to maintain favorable balance of payments and import quotas or quantity restrictions including import prohibitions and licensing.
Slowly the countries began to grow familiar to the fact that the old school of thoughts were no longer going to be practical and that they had to keep reviewing their international trade policies on continuous basis and this interns lead to all countries agreeing to be guided by the international organizations and trade agreements in terms of international trade.
Today the understanding of international trade and the factors influencing global trade is much better understood. The context of global markets have been guided by the understanding and theories developed by economists based on Natural resources available with various countries which give them the comparative advantage, Economies of Scale of large scale production, technology in terms of e commerce as well as product life cycle changes in tune with advancement of technology as well as the financial market structures.
For professionals who are occupying management or leadership positions in Organizations, understanding the background to the international trade and economic policies becomes necessary as it forms the backdrop for the business organizations to charter their course for growth.
Favorable Trade Balance
Many countries implement trade policies that encourage a trade surplus. These nations prefer to sell more products and receive more capital for their residents, believing this translates into a higher standard of living and a competitive advantage for domestic companies. For some, this holds true, especially over the short term.
Unfortunately, to maintain a trade surplus, some nations resort to trade protectionism. They defend domestic industries by levying tariffs, quotas, or subsidies on imports. Soon, other countries react with retaliatory, protectionist measures, and a trade war ensues. Inevitably, this results in higher costs for consumers, reduced international commerce, and diminished economic conditions for all nations.
When the United States buys goods from another country, it will usually pay for those goods in the currency of the exporting country. Many international transactions involve the exchange of money between nations. The balance of payments is an accounting record of the difference between the amount of money that a country receives (known as inpayments) and the amount of money that it pays out (known as outpayments). A positive overall balance of payments means that a country has realized more aggregate inpayments than outpayments over a period (typically one year). In contrast, a negative balance of payments exists when a country pays out more money than it takes in.
Any transaction that involves a flow of funds between countries is recorded in one of several accounts within a nation's balance of payments. The largest single account in the overall balance of payments is, for most countries, the current account. The balance of trade, as noted above, records the flow of merchandise exports and imports and is a component of the current account. When adding the net flow of funds arising from services to a nation's balance of trade, one obtains the balance on goods and services (also recorded in the current account). Finally, net unilateral transfers (one-way flows by individuals, governments, and businesses) are included in a nation's current account as well.
Across global markets, it is not uncommon to observe the buying and selling of both real assets (plant and equipment, land) and financial assets (stocks, bonds). Such transactions are recorded in the capital account of a nation's balance of payments. One last category of international transactions involves those arising among governments and central banks. These transactions are recorded in the official reserve account of a nation's balance of payments.
While unimpeded free trade tends to promote the greatest benefits arising from international specialization, the importing and exporting of some goods and services is controlled by the U.S. government (and the governments of other nations as well). Three of the most common impediments to trade are tariffs, quotas, and embargoes. A tariff is a tax levied by the government on the importation of goods. An import quota sets a physical limit on the amount of goods that may be imported during a given period. An export quota does the same for a nation's exports. Finally, an embargo (import or export) is employed when a government wishes to completely halt all imports or exports of a specific product.
Balance of trade
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o desequilibrio comercial.
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Economía y FinanzasLa balanza comercial es favorable o activa cuando las exportaciones, en un período dado, supe. . se habla de una balanza comercial desfavorable o pasiva. .
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Desde la mas remota antigüedad, los chinos realizaban los intercambios comerciales sobre la base del trueque. Hasta mediados del segundo a.C. se empleaban .
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Balance of Trade
The balance of trade (BOT) is defined as the country’s exports minus its imports. For any economy current asset, BOT is one of the significant components as it measures a country’s net income earned on global assets. The current account also takes into account all payments across country borders. In general, the trade balance is an easy way to measure as all goods and services must pass through the customs office and are thus recorded.
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Source: Balance of Trade (wallstreetmojo.com)
Balance of Trade formula = Country’s Exports – Country’s Imports.
For the balance of trade examples, if the USA imported $1.8 trillion in 2016, but exported $1.2 trillion to other countries, then the USA had a trade balance of -$600 billion, or a $600 billion trade deficit.
$1.8 trillion in imports – $1.2 trillion in exports = $600 billion trade deficit
For any economy current asset, the balance of trade is one of the significant components as it measures a country’s net income earned on global assets. The current account also takes into account all payments across country borders. In general, the trade balance is an easy way to measure as all goods and services must pass through the customs office and are thus recorded.
- In effect, an economy with a trade surplus lends money to deficit countries whereas an economy with a large trade deficit borrows money to pay for its goods and services. In some cases, the trade balance may be correlated to a country’s political and economic stability as it reflects the amount of foreign investment in that country. Most nations view this as a favorable trade balance.
- When exports are less than imports, it is known as the trade deficit. Countries usually regard this as an unfavorable trade balance. However, there are instances, when a surplus or favorable trade balance is not in the country’s best interests. For a balance of trade examples, an emerging market, in general, should import to invest in its infrastructure
Some of the common debit items include foreign aid, imports, and domestic spending abroad and domestic investments abroad whereas credit items include foreign spending in the domestic economy, exports, and foreign investment in the domestic economy.
The US had a trade deficit since 1976, whereas, China has a trade surplus since 1995.
A trade surplus or deficit is not always a final indicator of an economy’s health and must be considered along with the business cycle and other economic indicators. For the balance of trade examples in times of economic growth, countries prefer to import more to promote price competition, which limits inflation whereas, in a recession, countries prefer to export more to create jobs and demand in the economy.
When is Trade Balance Positive?
Most countries work to create policies that encourage a trade surplus in the long term. They consider a surplus as a favorable trade balance because it’s considered as making a profit for a country. Nations prefer to sell more products when compared to buy products which in turn receive more capital for their residents which translates into a higher standard of living. This is also beneficial for their companies as they gain a competitive advantage in expertise by producing all the exports. This results in more employment as companies hire more workers and generate more income.
- Let us take another balance of trade example – Hong Kong in general always has a trade deficit. But it is perceived as positive because many of its imports are raw materials which convert into finished goods and finally exports. This gives it a competitive advantage in manufacturing and finance and creates a higher standard of living for its people.
- Another balance of trade example is Canada’s whose slight trade deficit is a result of its economic growth and its residents enjoy a better lifestyle which is afforded only by diverse imports.
When is Trade Balance Negative?
In most situations, trade deficits are an unfavorable balance of trade for a country. As a rule of thumb, geographies with trade deficits export only raw materials and import a lot of consumer products. Domestic businesses of such countries don’t gain experience with time which is needed to make value-added products in the long run as they are mainly in the raw material exporter and thus economies of such countries become dependent on global commodity prices.
There are some countries that are so opposed to trading deficits that they adopt mercantilism to control it and this is considered as an extreme form of economic nationalism that works to remove the trade deficit in every situation.
It advocates protectionist measures such as import quotas and tariffs. Although these measures may result in the reduction of the deficit in the short run, they raise consumer prices. Along with this, such measures trigger reactionary protectionism from other trade partners.
This has been a guide to what is Balance of Trade and its definition. Here we explain the formula of Balance of Trade along with practical examples. In addition, we discuss a trade surplus and trade deficit. You may learn more about macroeconomics from the following articles –
Generosa Eloise Yankey says
Balance of payments
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Balance of payments, systematic record of all economic transactions between residents of one country and residents of other countries (including the governments). The transactions are presented in the form of double-entry bookkeeping.
There can be no surplus or deficit in a country’s balance of payments as a whole (as distinguished from its balance of trade) because every payment will have an offsetting receipt.
The balance of payments of Japan, for example, records the various ways in which yen are made available to foreigners through Japanese purchases of foreign goods, expenditures of Japanese tourists abroad, donations, loans, etc. These expenditures are shown on the debit side of the balance. The receipts side indicates the various uses to which foreigners put their yen, such as purchases of Japanese goods, interest on Japanese loans, etc. If foreigners do not spend all the yen made available to them, the balance of payments will show on the credit side an increase of foreign-held yen balances, foreign purchases of Japanese securities, gold exports from Japan, or some similar item. See also international payment and exchange.
23.2 Trade Balances in Historical and International Context
The history of the U.S. current account balance in recent decades is presented in several different ways. Figure 1 (a) shows the current account balance and the merchandise trade balance in dollar terms. Figure 1 (b) shows the current account balance and merchandise account balance yet again, this time presented as a share of the GDP for that year. By dividing the trade deficit in each year by GDP in that year, Figure 1 (b) factors out both inflation and growth in the real economy.
Figure 1. Current Account Balance and Merchandise Trade Balance, 1960–2013. (a) The current account balance and the merchandise trade balance in billions of dollars from 1960 to 2013. If the lines are above zero dollars, the United States was running a positive trade balance and current account balance. If the lines fall below zero dollars, the United States is running a trade deficit and a deficit in its current account balance. (b) These same items—trade balance and current account balance—are shown in relationship to the size of the U.S. economy, or GDP, from 1960 to 2012.
By either measure, the general pattern of the U.S. balance of trade is clear. From the 1960s into the 1970s, the U.S. economy had mostly small trade surpluses—that is, the graphs of Figure 1 show positive numbers. However, starting in the 1980s, the trade deficit increased rapidly, and after a tiny surplus in 1991, the current account trade deficit got even larger in the late 1990s and into the mid-2000s. However, the trade deficit declined in 2009 after the recession had taken hold.
Table 4 shows the U.S. trade picture in 2013 compared with some other economies from around the world. While the U.S. economy has consistently run trade deficits in recent years, Japan and many European nations, among them France and Germany, have consistently run trade surpluses. Some of the other countries listed include Brazil, the largest economy in Latin America Nigeria, the largest economy in Africa and China, India, and Korea. The first column offers one measure of the globalization of an economy: exports of goods and services as a percentage of GDP. The second column shows the trade balance. Most of the time, most countries have trade surpluses or deficits that are less than 5% of GDP. As you can see, the U.S. current account balance is –2.3% of GDP, while Germany’s is 7.4% of GDP.
|Exports of Goods and Services||Current Account Balance|
|Table 4. Level and Balance of Trade in 2013 (figures as a percentage of GDP, Source: http://data.worldbank.org/indicator/BN.CAB.XOKA.GD.ZS)|
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