The term balance of trade refers to the monetary difference between exports and imports by a country in a given period of time. There can be a negative balance when imports exceed exports, or a positive balance when the opposite happens. On some occasions, it is customary to divide the trade balance into a balance of goods and services. The trade balance is an integral part of the so-called current account, which includes other transactions such as investment income and international aid.
To properly explain a trade balance can be tricky as there are problems with all the corresponding data. To be aware of this situation, it is enough to compare the records of all countries during a certain period. Exports exceed global imports by about one percent, as if the world had a positive trade balance with itself; this situation is absurd as all purchase operations should cancel sales. A possible explanation for this phenomenon is the existence of transactions made for the purpose of laundering money or evading taxes.
Factors that can affect the trade balance are: the production costs of the exporting economy against the importing one, the cost of raw materials and intermediate goods, and finally, trade restrictions and taxes. In addition, the trade balance tends to vary throughout the business cycle, as in economic expansions.
Traditionally, developed countries have a special relationship with the import of raw materials and then export manufactured goods to underdeveloped countries, and thus add value with this important process. This leads underdeveloped countries to show trade deficits and, on the other hand, developed countries show surpluses in the trade balance. However, in these considerations, it is worth noting that since the mid-eighties, developed countries like the United States have seen their deficit increase with regard to goods, especially in relation to Asian countries.
Have a positive trade balance has as consequence automatic gross domestic product growth, in contrast, have a trade deficit automatically reflected in its fall. That is why countries must diligently consider this variable in order to avoid disastrous economic consequences.
