What is the balance of trade?
Balance of trade (BOT) is the difference between the value of a country's exports and the value of a country's imports for a given period. Balance of trade is the most significant component of a country's balance of payments (BOP). Sometimes, the trade balance between a country's goods and the trade balance between its services are distinguished as two separate figures.
Understanding the Balance of Trade (BOT)
The formula for calculating the BOT can be simplified as the total value of exports minus its imports. Economists use the BOT to measure the relative strength of a country's economy. A country that imports more goods and services than exports in terms of value has a trade deficit or a negative trade balance. Conversely, a country that exports more goods and services than imports have a trade surplus or a positive trade balance.
Calculating the Balance of Trade (BOT)
For example, the United States imported $239 billion in goods and services in August 2020 but exported only $171.9 billion in goods and services to other countries. So, in August, the United States had a trade balance of -$67.1 billion, or a $67.1 billion trade deficit.
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 a month, a quarter, or a year.
The trade balance is also referred to as the trade balance, the international trade balance, commercial balance, or the net exports.