What is the Trade Balance: What it Measures and Examples

The trade balance is the record of imports and exports of a country in a given period. It is also called merchandise balance.

Through the trade balance, income from the sale of national goods abroad and expenses from the purchase of foreign goods are recorded and compared. In other words, the trade balance allows you to record the value of a country’s exports and imports.

The trade balance is used to understand the supply and demand of the market, as well as to identify possible signs of economic expansion or contraction.

Its importance lies in the fact that it helps to understand the economic potential of a country in relation to others, useful information to determine with which countries to establish trade relations or in which areas to invest.

The balance of the trade balance can be positive or negative, in which case we speak of trade surplus or trade deficit respectively. When the balance tends to zero, it is said that there is balanced trade.

trade surplus

A trade surplus is when the total value of a country’s exports is greater than the value of its imports. This means that sales have been greater than purchases.

A country with a positive trade balance is considered a mainly exporting country.

This scenario is described as a favorable trade balancesince a higher level of income represents a greater capacity for investment and development.

For example, suppose that in a given month a country registered income of 12,000.00 dollars from exports. Likewise, it registered 7,250.00 dollars for imports. Calculating the difference between the two, the result is a balance of $4,750.00.

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This balance has been positive. We speak, then, of a favorable balance of the trade balance and, therefore. In this case, there is a trade surplus of $4,750.00.

See also: Surplus

Trade deficit

Trade deficit is when the value of all imports exceeds the value of exports. It means that purchases have been greater than sales.

A country with a negative trade balance is considered an importing country.

In this scenario we talk about unfavorable balance of trade, since the country buys more than it sells. This is usually at the root of public or private indebtedness, tied to the increase in the price of foreign currency.

For example, suppose that a country registered income from exports of 7,000.00 dollars and expenses from imports of 10,000.00 dollars. The difference between both figures gives a balance of -$3,000.00.

In this example, the balance of the trade balance has been negative. Therefore, there is a trade deficit of $3,000.00.

balanced trade

Balanced trade occurs when the difference between exports and imports is equal to or close to zero. Therefore, neither profit nor loss is recorded, so the balance of trade is in balance.

For examplein a country that registered 2,000.00 dollars in income from exports and 2,000.00 dollars in expenses from imports, the calculation of the difference gives $ 0. This is a balanced trade scenario.

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How to calculate the balance of the trade balance?

It is calculated with a simple operation of subtraction between the total income from exports and expenses from imports.

The formula is as follows:

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Exports – Imports = balance of the trade balance

For example: In 2019, the country of Mexico registered revenues of 411,894.2 million euros from exports. It also recorded expenses for imports of 417,456.1 million euros. So, if we apply the formula we get the following result:

€411,894.2M – €417,456.1M = -€5,561.8M

Therefore, Mexico’s trade balance in 2019 was -€5,561.8 million. It is, therefore, a negative balance of the trade balance or deficit.

Variables that affect the trade balance

Although the trade balance allows us to get a fairly approximate idea of ​​the economic direction of a country, by itself it is not a sufficient indicator to interpret the behavior of the general economy.

This is because, on the one hand, it only reflects one aspect of the economy and, on the other hand, this aspect is affected by various variables.

Among some of the variables that affect the trade balance we can mention:

  • The consumption preferences of the population with respect to national and foreign products.
  • The selling price to the consumer of imported products.
  • The average income of consumers from imports or exports.
  • Government policies regarding foreign trade.

Trade balance and balance of payments

The balance of payments consists of the total record of commercial operations, services and movement of capital of a country with the countries with which it maintains commercial relations.

The trade balance is one of the components of the balance of payments, and it is the most important, since it is an indicator of the country’s commercial performance.

Other components of the balance of payments are the balance of income, the balance of transfers, and the balance of services.

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