Balance of TradeDefined along with Formula & How to Calculate

Written By:
Lisa Borga

What is the Balance of Trade (BOT)?

A balance of trade (BOT) for a country, also referred to as its trade balance or commercial balance, is the difference between the monetary value of its exports and its imports over a specific time period.

A country’s balance of trade makes up a large part of its balance of payments (BOP).

The balance of trade for a country’s services is sometimes calculated separately from the balance of trade for its goods.

Explaining Trade Balance

The formula for computing the balance of trade is:

Balance of Trade = Value of a Country’s Exports – Value of a Country’s Imports

Many economists use a country’s trade balance to help analyze the strength of the country’s economy.

If a country imports more services and goods that have a greater monetary value than it exports, it is considered to have a trade deficit.

In contrast, if a country exports services and goods that have a great monetary value than those it imports, it is considered to have a trade surplus.

Some countries have a trade deficit most of the time, such as the United States.

The United States has had a trade deficit every year since 1976.

The United States also had a trade deficit during most of the nineteenth century.

In contrast, China has a trade surplus. In fact, China’s surplus has increased even during the pandemic with the reduction in global trade.

This does not necessarily mean China has a healthy economy and the United States does not.

It is essential to look at more than a country’s trade deficit or trade surplus when evaluating the health of a country’s economy.

The balance of trade should be looked at as part of the business cycle.

If a country is experiencing a recession, jobs are a big concern.

So, a country will likely want to. Increase exports in an attempt to create jobs.

Whereas, if the country is experiencing an economic expansion, it might want to increase imports so as to increase price competition in an attempt to help control inflation.

A Positive Balance of Trade

Although there are times when a country might prefer a trade balance, most countries prefer to have a trade surplus in the long run.

A trade surplus is often thought of as a profit for the country.

Exporting goods can also give companies a competitive edge.

This may also cause a company to increase its number of employees, which is good for the residents of the country.

A Negative Balance of Trade

Although many people believe a trade deficit is bad, this is not always the case.

It is generally also not a result of trade policy.

Trade deficits have more to do with investment and savings rates.

A trade deficit is caused by an excess of investment over savings.

Computing the Trade Balance

As an example, the United States imported 317.8 billion in services and goods in February 2022.

Whereas the country exported 228.6 billion in services and goods.

Therefore, the United States had a trade deficit of 89.2 billion in February 2022.

If a country has a trade deficit, it means that it is borrowing money to pay for the goods and services it is importing.

Although, the trade deficit could be a result of the country’s economic or political situation since it is an indication of how much investment is coming from abroad in the country.

Some items are debited, such as domestic spending in foreign countries, foreign aid, domestic investments in foreign countries, and imports.

Whereas some items are credited, such as foreign investments in the domestic economy, exports, and foreign spending in the domestic economy.

The trade deficit or surplus for a specific period can be computed by adding up the debit items and then subtracting the credit items from this total.

Key Takeaways

• A country’s trade balance is calculated by taking the difference between the monetary value of the country’s imports and its exports over a given period. This makes up the largest part of the balance of payment for a country.
• When the monetary value of a country’s imports of services and goods is greater than the monetary value of its exports, the country has a trade deficit. However, if the monetary value of a country’s exports is greater than its imports, the country has a trade surplus.