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The balance of trade (BOT), also known as the trade balance, refers to the difference between the monetary value of a country’s imports and exports over a given time period. A positive trade balance indicates a trade surplus while a negative trade balance indicates a trade deficit. The BOT is an important component in determining a country’s current account.
Formula
The formula for calculating trade balance is as follows:
Total value of exports – the total value of imports = Balance of trade
Where:
- Value of Exports is the value of goods and services that are sold to buyers in other countries.
- Value of Imports is the value of goods and services that are bought from sellers in other countries.
Balance of Trade deficit
If the value of imports is greater than the value of exports we say a country has a trade deficit. This can occur for various reasons such as:
- Falling comparative advantage in manufactured goods
- Overvalued exchange rate – causing exports to be more expensive and imports cheaper
- High levels of consumer spending and low savings ratio – which encourages import spending relative to exports.
- In recessions, the balance of trade tends to improve as consumer spending falls and demand for imports goes down.
