Balance of Trade (BOT)

Balance of trade (BOT) is a concept used to measure the relative economic health of a country by comparing the monetary value (in its own currency), of the goods and services the country exports within a given period against the value of the goods and services that country imports during the same period. The idea can be compared with estimating the economic condition of a household by comparing the amount its members earn in a year with the amount that they spend during that year. This is because a country’s exports are materials or services being sold (at a profit, usually) and thus generating income, while a country’s imports are goods and services being purchased from entities outside the country. Thus, balance of trade is an indicator of whether a country is spending more than it earns, which is termed a negative trade balance, or earning more than it spends (known as a trade surplus).

Brief History

A negative BOT is not necessarily cause for immediate panic. The global economic landscape is vast and complex, composed of a multitude of interconnected factors, and one consequence of this complexity is that even the most productive and closely regulated economy can expect to be affected from time to time by unpredictable fluctuations in supply and demand. Some of the many factors that impact BOT include adjustments in exchange rates between different currencies; regulatory measures in either the home country or the destination country of the exports, which may alter the profitability of the transaction; and changes in the cost or availability of raw materials and production of those materials into finished goods.

With the rise in international trade throughout the nineteenth and twentieth centuries, intensified by globalization, increasing attention has been paid to the role played by BOT in the world economy. Theorists Adam Smith and John Maynard Keynes both wrote extensively about the degree to which trade imbalances are problematic, describing the design of mechanisms capable of correcting such imbalances. Ordinarily, countries are able to cope with normal fluctuations in trade balances by drawing upon their foreign exchange reserves. Foreign exchange reserves are financial accounts maintained either by a country’s central bank or by an international trade body acting to help several countries coordinate their import and export activities. When a country has a trade surplus, the excess can be added to the foreign exchange reserve, and when a country experiences a trade deficit, it can draw upon its foreign exchange reserve in order to continue to perform international transactions. In the absence of foreign exchange reserves, a country that experiences an extended period of trade deficits might, in theory, find itself unable to purchase additional goods and services for import, having exhausted its financial capacity; this is analogous to a person who spends his entire savings and is then unable to buy anything else because he has neither money nor credit available.

Overview

How to allocate the responsibility for countries to keep their trade in balance is a subject for debate among economists. One school of thought holds that countries that are able to achieve a trade surplus do so through their own merits and are therefore entitled to benefit from their superior business acumen. Countries with a trade deficit, on the other hand, are sometimes seen as handling their economic affairs in an incompetent manner. Because of these perceptions, some have concluded that countries enjoying a surplus should be at liberty to enjoy it, while countries with a consistent deficit should bear the responsibility for bringing their trade back into balance. Another view holds that, for the most part, every country has a duty to give its best effort toward keeping its import and export activities in balance. This perspective cautions against countries flooding the international marketplace with their exports in order to drive their competitors out of business, with the incidental effect of creating a substantial trade surplus for the country seeking to control the market. International trade policy seeks to deter both predatory export policies and imprudent reliance on imports, to maintain the overall balance of trade.

Some calculations and theoretical approaches distinguish between different types of trade when determining a country’s BOT. One of the most common distinctions made is between the international market for goods—that is, material items sold in their original state or after being used to manufacture other goods—and the international market for services, in which one party performs an action or series of actions at the behest of another party. A service based transaction would be, for example, a technology company in China paying a technical support firm in the Netherlands to provide telephone customer support for the buyers of the Chinese firm’s gadgets. Differentiating between the BOT for goods and for services allows countries to participate in the global marketplace that might otherwise not be able to. For example, a small island nation might lack sufficient raw materials to be able to have any exports of significance. If trade were measured only in the transfer of goods, then this nation would be able to engage in only a minimal amount of importing and exporting. However, when the BOT also factors in the importation and exportation of services, then there is the possibility that a trade deficit in goods can be compensated for by a trade surplus in services.

To continue with the example of the small island nation, its lack of raw materials for export would create a trade deficit as far as material goods are concerned, but if a large portion of the country’s population were engaged in providing services to citizens of other nations, then this could offset the deficit or even result in an overall trade surplus. This point of view is especially important now that the Internet has made the provision of services over long distances easier than ever before.

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