Trade Balance

The balance on the goods trade in a nation's current account is known as the balance of trade, or trade balance. The current account includes all international economic transactions with income or payment within the year; the goods trade records all transactions involving merchandise or goods. The exports of goods by a country are merchandise credits; its import of foreign goods are merchandise debits. When exports (or credits) exceed imports (or debits), the goods trade shows a surplus. When imports exceed exports, the account shows a deficit.

The export and import of goods is known as merchandise trade. It is the oldest and most traditional form of international economic activity. Although many countries depend on imports of many goods (as they should, according to the theory of comparative advantage), they also normally work to preserve either a balance of goods trade or a surplus. Because the current account is typically dominated by the export and import of merchandise, the balance of trade, or trade balance, which is so widely quoted in the business press in most countries, refers specifically to the balance of exports and imports of goods trade only. For a larger industrialized country, the trade balance is somewhat misleading because service trade is not included. It may be opposite in sign on net (in surplus, for example, when goods are in deficit) and it may actually be fairly large as well. For example, the U.S. goods trade balance has consistently been negative, but has been partially offset by the continuing surplus in the services trade.

What does it mean if a country's trade balance runs a persistent deficit? It means that country is borrowing from the rest of the world so that it can spend in excess of its own consumption. Underdeveloped countries limited to a single export experience trade deficits, but developed countries that have lost their manufacturing base experience them as well.

Merchandise trade, the original core of international trade, has three components: manufactured goods, agriculture, and fuels. The manufacturing of goods was the basis of the Industrial Revolution. The decline in manufacturing by industrialized countries has caused massive economic and social disruptions. Weaker domestic currency, rapid economic growth in Asia and Latin America, and a substantial increase in agricultural exports raise the overall export of goods.

Merchandise Import and Export

Understanding merchandise import and export performance is much like understanding the market for any single product. The demand factors that drive both imports and exports are income, the economic growth rate of the buyer, and price (the price of the product in the eyes of the consumer after passing through an exchange rate). As income rises, so does the demand for imports. Exports follow the same principle but in reverse. When buyer economies are growing, demand for supplier economies' products will also rise.

While managers understand that expanding into international markets can have a positive impact on their firms' bottom line, and use foreign direct investment (FDI) to participate in the emerging global marketplace, they may not understand the impact of their FDI on the trade balance of the host country. Edward Graham and Paul Krugman have shown that affiliates of foreign firms in the United States show an apparent tendency to export somewhat less and to import significantly more—2.25 times as much as U.S. firms.

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