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Definition of trade balance

What is the trade balance

The balance of trade (BOT), which is an abbreviation for (Balance of trade), is defined as the difference between the value of imports and exports for a particular country during a certain period, and it is part of a larger economic unit, which is the balance of payments. It has, such as: the dollar for the United States or the euro for the European Union.
Definition of trade balance
Definition of trade balance
The trade balance is used to measure the relative strength of countries' economies; In the event that the country exports a value greater than it imports, this leads to the occurrence of a trade surplus to it, or what is known as the positive trade balance, while if the value of what countries imports is greater than the value of what is exported, then this is known as the negative trade balance. What happened in 2019 where Germany had the largest trade surplus by calculating the trade balance followed by Japan and China, while the United States faced a trade deficit.

What are the components of the trade balance?

Economic products are classified in the trade balance account into goods or services that directly affect the values ​​of exports and imports, and are affected by many factors that control the prices of these goods and services, including the following:
  • Commodities: They mean tangible goods that are produced locally, for example: food, medicine, cars and energy sources.
  • Services: Services depend on human interactions that are based on providing support or bearing the responsibility to perform a task, and the scope of services can be in many places, such as: places of entertainment, education, sales and health care.
  • Prices of goods and services: where the prices of goods and services are affected by many factors, including:
  • Production costs: The prices of goods and services are initially affected by production costs, such as: raw materials, storage and transportation expenses, and personal expenses.
  • Profit margin: the profit margin is added according to the local supply or demand, which can change seasonally and is affected by economic and financial conditions, such as inflation and taxes.
  • Foreign demand: It is the final determinant of prices, especially if the value of the foreign currency is more valuable than the local currency, which will lead to higher export prices.

How is the trade balance calculated?

The trade balance is one of the important elements in determining the current account of countries, as a positive trade balance indicates a trade surplus, while a negative trade balance indicates a trade deficit, so it is important to know how to calculate the trade balance using the following equation:

Trade balance = total value of exports - total value of imports.
  • Where: The value of exports: refers to the value of goods and services that are sold to other countries.
  • Imports value: refers to the value of goods and services purchased from other countries.

Example of a trade balance account

For example: The United States imported many goods and services in 2020 with a value of 239 billion dollars, while it exported 171.9 billion dollars of goods and services to other countries. Using the previous equation, the trade balance can be calculated as follows:

171.9 million dollars in exports - 239 million dollars in imports = - 67.1 billion dollars.

After calculating the trade balance, this indicates that the country suffers from a large trade deficit, and therefore it is based on borrowing in order to pay for goods and services, as the trade balance often reflects the political and economic stability of countries.

How does the trade balance affect the economy?

The trade balance reflects the ability of countries to produce additional resources to increase their economic growth, as governments and central banks monitor the trade balance in order to adjust policies. Indicates the strength or weakness of the economy, as there are many circumstances and factors that are taken into consideration, including the following:
  • Major local industries and their internal conditions: such as domestic supply or demand.
  • Raw material costs.
  • exchange rate fluctuations.
  • Policies, taxes, regulations and trade restrictions.
  • International relations with major trading partners.

What do major trade balance reports around the world contain?

Work is done to issue the trade balance report during different periods, which may be monthly, such as the United States, which is working to publish the American trade balance report in a monthly manner, as its goal is to inform the public about the country’s economy, income and external expenditures, and these reports can also contain goods and services Or only goods, if there is a trade surplus resulting from export, this will affect the currency in a positive way, while the trade deficit indicates an economic recession, and the impact of the report depends on many factors, such as: the value of the currency, economic policies and market sentiment.

What is the difference between the balance of trade and the balance of payments?

The balance of payments is defined as the record that includes all international commercial and financial transactions carried out by all the population of a country, and the balance of payments consists of: the current account, which measures international trade and net income on investments, the financial account, which describes the change in the international ownership of assets, the capital account, which It includes any other financial transactions that do not affect the economic output of countries.

The difference between the balance of payments and the balance of trade appears in that the trade balance includes exports and imports only, so the difference between them is the trade balance, while the balance of payments includes all visible and invisible items exported and imported from countries in addition to exports and imports, and thus the trade balance is part of the balance of payments .

To know the impact of the Corona pandemic on the movement of the trade balance in the countries of the world, you can see the following article: The impact of the Corona virus on the movement of the trade balance of countries.
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