Balance of trade

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Balance of trade figures, also called net exports (NX), are the sum of the money gained by a given economy by selling exports, minus the cost of buying imports. They form part of the balance of payments, which also includes other transactions such as the international investment position.

The figures are usually split into visible and invisible balance figures. The visible balance represents the physical goods, and invisible represents other forms of trade, e.g. the service economy.

A positive balance of trade is known as a trade surplus and consists of exporting more (in financial capital terms) than one imports. A negative balance of trade is known as a trade deficit or, informally, as a trade gap, and consists of importing more than one exports. Neither is necessarily dangerous in modern economies, although large trade surpluses or trade deficits may sometimes be a sign of other economic problems.

Factors that can affect the balance of trade figures include:

Measuring the balance of payments can be problematic, due to problems with recording and collecting data. As an illustration of this problem, when official data for all countries in the world is added up it appears that the world is running a positive balance of payments with itself. The total reported amount of exports in the world is greater by a few percent than the total reported amount of imports. This cannot be true, because all transactions involve an equal credit or debit in the account of each nation. The discrepancy is widely believed to be explained by transactions intended to launder money or evade taxes, and other visibility problems.


Economic Impact of Balance of Trade

If the balance of trade is positive, then an economy exported more than it has imported. This may appear to be a good thing but may not always be so. An example of an economy in which a positive balance of payments is generally regarded as a bad thing is Japan in the 1990s. Because Japan had a consistently positive balance of payments, it had more currency than it could effectively invest, and it was reluctant to also offer full access to its own markets. This led to huge Japanese overseas purchases of items such as real estate, which were of questionable economic value. Furthermore, the protectionist measures that created the positive balance of trade also caused the price of goods in Japan to be much higher than they would have been had imports been freely allowed. The foreign currency Japanese companies earned overseas remained largely unconverted into yen in order to suppress the yen's value, further preventing Japanese consumers from benefiting from a vaunted "trade surplus".It is also possible for the terms of trade to be lower than before if there is an improvement in the balance of trade.

Negative balances are not necessarily terrible news, either. By economic definition, a persistent trade deficit can only exist if there is a corresponding capital surplus. Otherwise, the currency would naturally decline until the deficit were eliminated.

Popular myths about trade deficits

Very few issues in economics are misunderstood by the politicians and the public as much as the trade deficit. The metaphor of trade as some kind of battle, where surplus countries win and deficit countries lose, ignores the observation that trade is based on regional specialization. The long term theoretical push is toward equilibrium, for trade deficits and surpluses can only exist when there is an excess or lack of demand for a country's investment assets.

Debate about the American trade deficit

The United States has posted a rising trade deficit since its last surplus during its recession in 1991. Its persistence has been attributed to the dollar's role as a reserve currency, continued growth in the US economy, and the continued high demand for American investment assets. The decline in manufacturing in the United States has also affected the trade deficit.

Physical trade balance

Monetary trade balance is different from physical trade balance (which is expressed in amount of raw materials). Developed countries usually import a lot of primary raw materials from developing countries at low prices. Often, these materials are then converted into finished products, and an enormous amount of value is added. Although the EU (and other developed countries) has a balanced monetary trade balance, its physical trade balance (especially with developing countries) is negative, meaning that in terms of materials a lot more is imported than exported. That means the ecological footprint of developed countries is much larger than that of developing countriess.

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