Foreign trade balance is Definition of the concept, its structure and essence

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The trade balance as one of the key indicators significantly affects the economic situation of the country. Also, to determine the place occupied by the state in the world economy, calculate such indicators as: GDP (GNP), national income and per capita income, level and quality of life, and others.

Foreign trade balance is a macroeconomic indicator that directly affects the change in the exchange rate, its value in the short term. If interest rates give an understanding of where the market will move in the long run, then the trade balance will show whether there is demand for the national currency.

What is the foreign trade balance?

The foreign trade balance is the difference between exports and imports (balance), in that order. In other words, the balance of trade is the difference between money flowing into and out of a country. Therefore, the balance can be both positive and negative (if expensesexceed income).

A common misconception is that if the foreign trade balance is positive, then everything is fine in the country and it develops economically, and vice versa, with a negative balance in the economy, there are big problems. Of course, the more income, the better, but this does not always mean the active development of the country.

Consider, for example, a new state that is just beginning to develop. The country has not established contacts with the outside world, perhaps it lacks the necessary resources to enter the world market, and so on. In this case, the country will incur heavy expenses from year to year, but at the same time getting used to the world market and continuously developing the domestic economy. On the other hand, in a well-developed country, there may be an annual positive balance due to already established sectors of the economy and no development. And in the case of technological progress in other countries, incomes will decrease.

Balance structure

The balance of trade includes all imports and exports and is a component of the balance of payments. The structure of the balance of payments is shown in the diagram below.

How to calculate the trade balance?

The foreign trade balance is the value of a country's exports minus imports.

Exports are goods and services produced domestically and sold to a foreigner.

Imports are goods and services purchased by residents of a country but produced in another country.

When exports exceed imports, it is positivetrade balance. Most countries consider this situation as a trade surplus. When exports are less than imports, this is a trade deficit. Country leaders usually see this as an unfavorable trade balance. But sometimes a favorable trade balance or surplus is not in the interests of the country. For example, an emerging market must import in order to invest in its own infrastructure. To this end, there may be a shortage for a short period of time.

Essentially, a country with a large trade deficit borrows money to pay for its goods and services, while a country with a trade surplus lends money to deficit partners. In some cases, the balance of trade may correlate with the political and economic stability of a country, as it reflects the amount of foreign investment in that country.

Debit items include imports, foreign aid, overseas domestic spending and investment. Credit items include exports, foreign spending in the domestic economy, and investment. By subtracting credit positions from debit items, economists get a trade deficit or surplus for a given country for a month, quarter, or year.

Active foreign trade balance

Most countries are trying to create trade policies that encourage trade surpluses. They prefer to sell more goods and get more capital for their population. This brings them to a higher standard of living. Their companies receive competitiveadvantage by producing through exports. They hire more workers, reducing unemployment and bringing in more taxes.

To maintain a positive foreign trade balance of the country, leaders often resort to trade protectionism. They protect domestic industry by levying tariffs, quotas or subsidies on imports. This usually doesn't work for long. Soon other countries are taking retaliatory measures to protect their own industries. Such actions are called trade wars.

But sometimes a deficit is a more favorable trade balance. It depends on where the country is in its development. For example, Hong Kong has a trade deficit. But many items from its imports are raw materials, which are then turned into finished products and then exported. This gives Hong Kong a competitive edge in the production of goods and creates a higher standard of living. Canada's small trade deficit is the result of its economic growth. Its residents enjoy a better lifestyle thanks to a variety of imports.

Former Romanian dictator Nicolae Ceausescu created a trade surplus that hurt his country. He used protectionism to support domestic industry. He also forced Romanians to save money instead of spending on imported goods. This led to such a low standard of living that people forced him to leave his post.

Negative trade balance

In most casestrade deficit is an undesirable indicator. As a rule, countries in such a situation export raw materials. They import a lot of consumer goods. Domestic enterprises do not gain the experience needed to produce value-added products. Their economy becomes dependent on world prices for raw materials. Such a strategy also depletes natural resources in the long run.

Some countries are so opposed to trade deficits that they embrace mercantilism. This is an extreme form of economic nationalism that says the trade deficit must be eliminated at all costs. She advocates protectionist measures such as tariffs and import quotas. While these measures may reduce shortages, they also raise consumer prices. Worst of all, they provoke reactionary protectionism from the country's trading partners. This reduces international trade and economic growth for all involved.

From time to time, trade surpluses are unfavorable, as stated earlier. China and Japan have become dependent on exports to spur economic growth. They must buy significant amounts of US Treasuries to keep the dollar high and their currencies low. In this way, they keep their exports at competitive prices and maintain their trade surplus. But this export-led strategy means they rely on customers and US foreign policy. In addition, their domestic market is weak. citizensChina and Japan must save for their old age as governments don't provide social services.

Russia's foreign trade balance

Russia has maintained a positive trade balance for the past 10 years, but in 2009 exports fell significantly due to the economic crisis. Since then, Russia has rebounded and the country is reporting a larger surplus than before the crisis.

The Russian economy has recently weakened due to lower global oil and gas prices, as well as international tensions resulting from the invasion of Ukraine. Nevertheless, Russia has a trade surplus.

The difference between trade and balance of payments

The foreign trade balance is the most important component of the balance of payments. The latter also takes into account international investments and net income from them.

A country can have a trade deficit, but still have a positive balance of payments. Foreigners invest in the growth of the country by lending to businesses. They also buy government bonds and hire workers from this country. If other components of the balance of payments are strong enough, this will offset the trade deficit.