01-10-2012, 05:13 PM
Balance of trade
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Definition
Balance Of Trade (BOT) is the difference between the value of exports and imports in a country over a certain period. A positive balance means that exports were higher than imports, it is referred to as a trade surplus. A negative balance is called trade deficit. The trade balance represents the difference between a nation's total production and its domestic consumption.
Meaning of Balance Of Trade
Balance of trade is the sum of the money gained by a given economy by selling exports, minus the cost of buying imports. They form part of the balance of trade, which also includes other transactions such as International investment the figures are usually split into visible and invisible balance figures. The visible balance represents the physical goods, and invisible represents other forms of trade.
How to Calculate Balance of Trade as a Percentage
A trade surplus results if a country exports more than it imports.
Balance of trade, sometimes called trade balance, is the difference between the total monetary amount of imports and exports of a particular country. If this difference is a negative number, that means the country imports more than it exports and is running what is called a "trade deficit." A trade deficit is not necessarily a negative. If a country's economy is experiencing strong expansion, that country should import more goods to limit inflation. Balance of trade is often calculated as a percentage of a country's gross domestic product (GDP), and this calculation is relatively straightforward.
Economic Impact of Balance of Trades
If the balance of trade is positive, then the economy has received more money than it has spent. This may appear to be a good thing but may not always be so. An example of an economy in which a positive balance of payments is generally regarded as a bad thing is Japan in the 1990s. Because Japan had a consistently positive balance of payments, it had more currency than it could effectively invest. This led to huge Japanese overseas purchases of items such as real estate, which were of questionable economic usefulness. Furthermore, the protectionist measures that created the positive balance of trade also caused the price of goods in Japan to be much higher than they would have been had imports been freely allowed.
Negative balances are not necessarily terrible news, either. In particular, an effect known as reserve currency status makes it possible for dominant currencies to run significant trade deficits with limited economic impact..