Trade Balance

The trade balance is a number that compares the monetary value of a country's flow of exports with its flow of imports over a specific period of time. The number is calculated exclusively from the current account of the country's balance of payments. If the number is positive, it indicates a trade surplus in that the monetary value of the exports sold exceeds the monetary value of the imports purchased; in other words, the country's international trade activity has generated a net inflow of monetary value. If, on the other hand, the number is negative, a trade deficit exists because the value of exports sold is not enough, by itself, to generate the funds necessary to finance the value of the imports purchased. In this case the country's international trade activity has generated a net outflow of monetary value to its trade partners. Theoretically, the trade balance could be zero, but independent pricing of exports and imports, combined with the timing of the millions of international transactions taking place, makes it nearly impossible in practice for the value of a country's flow of exports to equal the value of its flow of imports.

The precise structure of the trade balance is not generally agreed to beyond the fact that it is made up of certain items that can be either exported or imported by a country over the time period in question. Pairings of a variety of items as exports and imports are found in the current account of a country's balance of payments. Any or all of these may be used to calculate a trade balance. The items in question are goods (tangible items), services (intangible items), current transfers (gifts and charity), and income (business profits).

In terms of goods and services, it is obvious that value may enter or leave the country as a result of receiving payment for exports or making payment for imports, respectively. Similarly, if more charitable donations are made abroad, value leaves the country. However, value can be similarly transferred abroad [Page 2088]when it is the result of income generated on an asset situated in one country but owned by someone in another. Investment income is, therefore, another component of the trade balance. Profits transferred home when generated by assets (e.g., stocks and branch plants) owned abroad indicate a monetary inflow in the same way as when an export is sold. When a foreign entity transfers abroad the profits it generates in the host country, an outflow of monetary value occurs in the same way as when an import is bought.

It should be obvious that care must be taken to understand which items from the current account are being used in any reported trade balance statistics and which are not. For example, if a country has a trade deficit in goods alone, the current account itself could very well be in surplus. In this way, the problem of how the trade deficit, as reported, is to be financed is not really an issue because of the narrow way in which the deficit was defined. Of course, if the country's goods trade is taken to be a key indicator of its economic health, then a trade deficit in goods is informative in that particular regard. However, since the service sector has been gaining in importance in many advanced economies, a trade balance that includes services becomes a more descriptive measure of international trade activity.

...