Balance of Trade

Definition trade balance:

  • The balance of trade measures net exports of goods and services (NX).
  • It is the value of exports – the value of imports.
  • It forms the major component of the current account, although it ignores international investment flows and current transfers.
  • The balance of trade refers to both trade in goods (visibles) and services (Invisibles) – Though people may refer to a specific balance of trade in goods.

Example of UK trade balance

Current-account

2012 Q3. The balance of trade in goods and services was – £11,660m

UK Current account

current-account-from-1987
UK current account from 1987

This shows the UK current account balance. The major component of the current account is the trade balance – trade in goods.

boe-uk-current-account-05-12

This shows the different components of the UK current account. The trade balance is often counter-balanced by investment incomes.

Balance of Trade deficit

If the value of imports is greater than the value of 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 – causing exports to be more expensive and imports cheaper
  • High levels of consumer spending and low savings ratio – which encourages import spending relative to exports.
  • In recessions, the balance of trade tends to improve as consumer spending falls and demand for imports goes down.

Related

This entry was posted in . Bookmark the permalink.