Trade Balance, Balance of Trade

Trade balance is the difference between a country’s imports and exports. When a country’s imports surpass its exports over a period of time, it is called a trade deficit. A country’s balance of trade is its largest component when it comes to payments. The value of balance of trade is expressed in domestic currency and is denoted by the symbol, ‘NX’.

Understanding Trade Balance

Trade balance is a reflection of a country’s international market and its domestic consumption. A country’s balance of trade comprises a major segment of balance of payments. This is an effective mechanism to quantify a country’s overall economic transactions with the rest of the world. It also affects the country’s overall GDP for that particular period.

What happens when a country’s exports exceed the total imports during a given period? Then, the balance of trade is termed as trade surplus or favorable balance of trade.

Composition of Trade Balance

For a given country, trade balance comprises those products that a country trades on with other countries. Factors that affect trade balance are:

• Demand and supply: The demand and supply trend defines the cost of domestic products to be sold in the international market.
• Domestic business: Sound, domestic policies are required to boost production and international trade. Some countries like the US provide subsidies to local manufacturers for exported goods and services.
• Trade agreements: Bilateral agreements govern international trade and define the products and their prices in the global context.
• External pressures: Many countries export items that face heavy competition in international market. This results in market segmentation and low pricing. Countries that are mostly oil exporters or IT hubs tend to generate favorable trade balance due to less competition in the international market. External pressures also work in the form of trade bans. These bans are enforced by either individual countries or international organizations such as the WTO or IMF.

• Exchange rate: For nations with low exchange rate values, balance of trade tends to remain unfavorable.

Proactive market policies are required to ensure that a country’s trade balance remains favorable. A sound trade balance represents an important benchmark as it reflects economic stability between nations. It fortifies trade ties with other countries and generates immense possibilities to stem job losses, inflation and unemployment.