Introduction
Balance of trade is a fundamental economic indicator that helps assess a country’s economic health and growth potential. It constitutes the largest component of gross domestic product (GDP). Thus, a trade surplus generally increases GDP, while a trade deficit weakens it.
Definition of balance of trade
The balance of trade or commercial balance is the account that tracks the value of exported goods and services and the value of imported goods and services in terms of a country’s monetary values with the rest of the world.
To calculate the trade of balance of an economy, national accounting evaluates imports and exports of goods and services based on customs statistics, over a given period, generally the year..
Meaning of balance of trade
The trade balance shows whether the country managed to sell more locally produced goods and services to foreign countries than it purchased during the period under consideration.
If the value of exports exceeds that of imports, we say that there is a trade surplus or that the trade balance is positive or in surplus, indicating a net inflow of national currency from foreign markets.
This surplus constitutes a vector of economic growth and an indicator of the attractiveness of a country’s goods and services to the rest of the world. In other words, it is highly competitive internationally and has benefited from international trade.
On the other hand, if imports exceed exports, the country has a trade deficit, or its trade balance is negative or in deficit, resulting in a net outflow of national currency. This deficit may reflect an increase in domestic demand for certain consumer or production goods. However, if it is structural, it can be perceived as a lack of competitiveness that hinders economic growth.
What is the formula for calculating the balance of trade?
The trade of balance is calculated as follows :
Balance of Trade= Value of Exports – Value of Imports
Exports correspond to the value of goods and services produced in a country and then sold abroad, while imports correspond to the value of goods and services produced abroad and purchased by that country.
What is the purpose of balance of trade?
The trade balance aims to quantify exports, which correspond to products manufactured in a country and sold abroad, and imports, which are products manufactured abroad and purchased by the country, and to highlight the positive or negative difference for the country’s economy.
The trade balance is an indicator of competitiveness. Thus, a trade surplus generally indicates a productive and competitive economy, capable of meeting international demand.
On the other hand, a trade deficit can signify a dependence on imports and weak domestic production. For a country, a trade deficit means that domestic demand is partly met by imported products, which can weaken certain local industries.
Moreover, trade deficit occurs when a country cannot efficiently produce its own goods because it lacks the knowledge and resources to develop these goods and services or because it prefers to acquire commodities from another nation.
However, a surplus or deficit does not necessarily indicate economic strength or weakness. Trade balance figures must be interpreted in the context of the country’s current economic conditions, economic policies, and business cycles.
In this framework, deficits can be a sign of a vigorous national economy with strong consumer demand, and surpluses can reflect the strength or competitiveness of the economy. The key is to ensure that trade imbalances are manageable and do not lead to economic vulnerabilities.
The risks of a trade deficit
The balance of trade is a crucial component of the current account of the balance of payments, which refers to the difference between the monetary value of a country’s exports and imports over a period of one year.
The balance of payments is a national accounting document that records all economic flows (goods, services, capital and financial flows) between a country and the rest of the world over the course of a year.
A prolonged trade deficit can lead to job losses in domestic industries facing competition from imports and can affect the country’s exchange rate, and may even force the state to resort to debt from the rest of the world to finance its imports.
Thus, a trade deficit can become an economic problem when the debt it generates is too heavy to bear, which can lead to dependencies on foreign powers and a lack of autonomy in strategic sectors, which constitutes a political problem.
Factors that influence the balance of trade
Several factors can influence the trade balance :
- The main national industries and their internal conditions such as local supply or demand ;
- Costs of raw materials and intermediate goods ;
- Exchange rate fluctuations ;
- Trade policies, taxes, regulations and restrictions ;
- Fiscal policy ;
- Demographic evolution ;
- The policy of stimulating domestic supply ;
- Subsidies granted to public enterprises or export sectors ;
- Weak domestic demand ;
- Credit cycles ;
- International relations with major trading partners ;
- Custom controls.
It is true that macroeconomic factors explain most of the changes in trade balances, while customs duties have a modest effect on the evolution of trade balances.
However, a sharp increase in tariffs would have adverse repercussions for production, employment and productivity and may influence the international organization of production by forcing companies to adjust the structuring of their internal and international investments and production, which may lead to significant economic costs and contagion effects in the long term, thus harming the global economy.
Moreover, any change in the trade balance between two countries generated by an adjustment in customs duties tends to be offset by changes in trade balances with other partners following reorientations of trade flows and has little, if any impact on the overall trade balance (the sum of all bilateral trade balances).
The coverage rate
The coverage rate is a ratio between inputs and outputs. The foreign trade coverage rate is thus the ratio between the value of exports and that of imports of goods and services between two areas.
It generally refers to the ratio of exports to imports between a country and the rest of the world, expressed as a percentage.
Conclusion
The balance of trade East an important parameter for assessing economic growth and measure its proximity to economic policy objectives.
He is considered the main economic indicator of a country’s international business activities and its commercial position on the world market, because it highlights the effectiveness of the country’s international business activities, and reveals whether it generates additional resources beyond its local value creation capacity.