• Balance of Trade

    The balance of trade is an important term of macroeconomics. Balance of trade is defined by the difference between the total value of export and import of an economy over a period of time. If export is more than import, then the difference between export and import is called as “Trade Surplus”. On the contrary, if import is more than export, then the difference between import and export is called as “Trade Deficit”.

    Balance of trade is a part of Current Account, which itself is an important part of Balance of Payment.

    The trade balance depends on the following factors:

    • The cost of economic advantage of producing a product within the economy. If producing the same product within country needs more money than importing from other countries, it is advisable to import the same.
    • The availability of labor force, investment, raw materials and energy.
    • The exchange rate movement. Domestic currency exchange rate movement affects import and export significantly.
    • The inter country trade policies and import/export taxes by both the government. Favorable policies and taxation boost the import/export.
    • Most importantly, the export/import figure largely depends on the economic cycle of the country. During expansion with high economic and industrial activity, export figure rises significantly. While during recession, export figure drops significantly and import increases.

    All the main export oriented economies like China, Japan, and Germany etc. are marinating huge trade surplus every quarter, while all the main importing countries like US and India etc. are facing huge trade deficit every quarter. Small trade deficit is not having any adverse effect to the economy if the GDP is growing the trade deficit is within the proper limit. Also high trade surplus builds forex reserves where high trade deficit erases forex reserves.

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