Balance of Trade

The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is the difference between the monetary value of a nation's exports and imports over a certain period.

If a country exports a greater value than it imports, it is called a trade surplus, positive balance, or a "favourable balance", and conversely, if a country imports a greater value than it exports, it is called a trade deficit, negative balance, "unfavorable balance", or, informally, a "trade gap".

Sometimes a distinction is made between a balance of trade for goods versus one for services. Generally trade surplus is seen as positive economic indicator however in exceptional circumstances trade deficit is due to government forex policy to achieve other macroeconomic goals.

The balance of trade forms part of the current account, which includes other transactions such as income from the net international investment position as well as international aid. If the current account is in surplus, the country's net international asset position increases correspondingly. Equally, a deficit decreases the net international asset position.

The trade balance is identical to the difference between a country's output and its domestic demand (the difference between what goods a country produces and how many goods it buys from abroad; this does not include money re-spent on foreign stock, nor does it factor in the concept of importing goods to produce for the domestic market).

Measuring the balance of trade can be problematic because of problems with recording and collecting data. As an illustration of this problem, when official data for all the world's countries are added up, exports exceed imports by almost 1%; it appears the world is running a positive balance of trade with itself. This cannot be true, because all transactions involve an equal credit or debit in the account of each nation. The discrepancy is widely believed to be explained by transactions intended to launder money or evade taxes, smuggling and other visibility problems. Especially for developing countries, the transaction statistics are likely to be inaccurate.

Factors that can affect the balance of trade include:

In addition, the trade balance is likely to differ across the business cycle. In export-led growth (such as oil and early industrial goods), the balance of trade will shift towards exports during an economic expansion. However, with domestic demand led growth (as in the United States and Australia) the trade balance will shift towards imports at the same stage in the business cycle.

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