Definition trade Balance: The balance of trade measures net exports NX. It is the value of exports – value of imports. It forms the major component of the current account, although it ignores international investment flows and foreign aid.
In the UK, the balance of trade just refers to trade in goods (visibles) however, in other countries the balance of trade refers to trade in goods and services.
Balance of Trade deficit
If the value of imports is greater than exports we say a country has a trade deficit. This can occur for various reasons such as:
- Falling Comparative advantage in manufactured goods
- Overvalued exchange rate
- High levels of consumer spending and low savings ratio.
- In recessions, the balance of trade tends to improve as consumer spending falls
- Trade deficit