What is Balance of Trade? 

• Balance of trade is one of the most important components of the balance of payments factors of a country. Balance of trade is calculated by subtracting the import of a country from the total export done by a country. 

•  In other words, it can also be said that balance of trade is the difference between the export of a country and the import of a country. It is the net export and import value that a country is having in the gross domestic product calculation. To have an equal balance of trade, the export of a country should always be equal to the import of a country.  

• The use of the balance of trade is done by the economist to evaluate or have an idea that what kind of relative strength is there in the economy of the country. 

•  The balance between the export and import of a country is very important because it determines that how strong the country can become. If a country does more export than import then it is considered that the country is strong enough and there is less cash outflow. On the other hand, if the country does more import it means that there is more cash outflow of that country. In other words, it can be said that whenever export is done by your country it earns foreign currency which means there is more cash inflow in the country. 

•  Whenever import is done by your country it means that the country is buying stuff from foreign which leads to cash outflow or giving away the home currency to another currency. In this way, the country that is doing the export does profit whereas the country that does import does not own any kind of profit but contrarily it does face loss.  

• Whenever there is more import done by your country than export, it is known as the trade deficit or negative balance of trade. On the other hand, whenever there is more export than import done by your country it is known as a positive balance of trade or trade surplus.  

• Whenever there is more import done by the country, there is a huge amount of cash outflow that the country faces. This situation is known as the unfavorable balance of trade. It is usually seen that the developed country always tries to maintain a positive balance of trade or trade surplus when it comes to the question of the net exports. But it is seen that in the case of developing countries there is always a chance of trade deficit or negative balance of trade.   

• The economic situation of a developing country is always like that the products or goods and economic services that they are producing in the country will always be a bit more expensive than the goods that have been imported. It can be understood with the help of an example.  

• In a country which is having advanced technology in terms of electronic goods, automatically the price of production or the cost of production in that country for producing electronics will be less than in a country that is not much technologically developed. Therefore, the country which is having technological advancement is having an absolute advantage in producing electronics and therefore the country which is not having the technological progress will import the goods from the technologically advanced country as because it will be cheaper for the country.  

• Sometimes the developing countries find it difficult to maintain a favorable balance of trade or even the trades surplus. As because of the above example it is seen that they need to pay relatively higher prices for the finished goods that they produced in their own country. They are 4 they import as because they pay lower prices. Also, contrarily it can be seen that Ben the developing countries are importing from foreign countries, be more for the imported goods but on the other hand when they are exporting their goods and services to the foreign country, they receive less foreign currency. This creates an unfavorable balance of trade. As because the cash outflow is more than the cash inflow which means that the next export is negative.  

Key Takeaways 

• In conclusion, it can be said that it is not always possible for any of the countries to operate in a trade surplus. Therefore, the developing country should always focus on how can the home or domestic products can be produced by cost reduction so that they don't have to import the goods from the foreign exporting countries because that can lead to cash outflow which is not favorable for our developing country.  

• On the other hand, they should practice import substitution. They should also focus on producing certain goods and services that make them stand out in the global economy and so that the foreign countries do export from the domestic economy and hence the economy gets up boost in terms of growth. 

•  Evaluating the balance between the import and export determines that what kind of cash inflow or outflow has been done. 

• A trade deficit is something that none of the countries wants to face but they do face for some reason or the other therefore certain steps should be taken by the government of that respective country to protect the small producers of the country and also support them so that in the future they can become one of the important players in the global economy.  

• Therefore, whenever it comes to an unfavorable balance of trade the intervention of international institutions concerning trade and also the intervention of the government becomes extremely important to move from trade deficit to trade surplus. But the trade surplus always does not mean that there will be always prosperity in the economy.   

• One of the adverse effects that can have when they arrest rates or plus in the country is that people will have more money in their hand to spend which will ultimately spike up the aggregate demand leading to excess demand and less supply which will result in inflation. Therefore, the country must always balance its exports and imports. 

Context and Applications  

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for  

• Bachelor of Business Administration
• Master of Business Administration 
• Bachelor of Commerce
• Master of Commerce