Balance of trade is a measure of a nation’s monetary value of imports and exports within a specified period of time. It is also defined as the difference between the value of payments and receipts involving two trading countries. A country experiences surplus trade when value of exports exceeds value of imports. Conversely, a country is said to experience deficit trade if the value of imports exceeds that of exports. It is rare for any country to experience an absolute balanced trade.
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Most countries attempt to improve their economy in order to avoid negative growth that always leads to trade gaps. It is apparent that a few factors frequently emerge, which consequently affect the level of trade balance either negatively or positively. These factors include cost of production, which merely depends on a number of aspects including capital, labor, taxes and land. Other factors affecting balance of trade include exchange rates, tariffs and taxes imposed on exports and imports, trade restrictions, availability of raw materials and other inputs required in production as well as availability of foreign currency to pay for the foreign goods and services (Thompson, 2006).
Merchant trade balance is majorly concerned about the measure of visible trade such as sale and purchase of vehicles and computers. In most cases, international trade involves trading in physical goods. A country can measure merchant trade balance by subtracting services from the total goods and services. When value of goods sold by a given country exceeds the value of purchases then the economy of a country is said to experience growth. Having a growth is beneficial considering that the value of currency of a specified country would have great demand, hence enabling its currency to appreciate. If a currency appreciates, it would mean that purchasing foreign goods would be much cheaper. On the other hand, a country is expected to experience negative growth if goods imported exceed the value of the goods exported. This means that a country will most likely face depreciation. Depreciation will negatively affect a country’s economy because it would need domestic currencies to purchase foreign goods.
Balance of services refers to measurement of payment and receipts for services, which include consultant services, patent services and tourism among other services. If a country acquires much of these services from a trading partner than it is offering then it stands a higher chance of plunging into a deficit trade. However, it may experience surplus if it would be able to offer more services to trading partners than it would be acquiring them. Surplus trade in services most probably helps a country to grow economically while deficit trade may interfere with a country’s resources. A country will as well have a surplus economy if the total income on exports ensuing from the sale of both goods and services surpasses the value of imports within a given period of time (Thompson, 2006).
Balance on investment income concerns the measure of income earned by residents from property owned by foreigners in the domestic economy. The term also covers income earned by foreigners from properties invested in their countries by a trading partner. Investment income includes both dividends earned from shares and interest paid on debts. If income earned by residents from foreign investments in the domestic economy exceeds that of income from properties invested abroad, one would say a country is facing surplus trade. A surplus trade in terms of investment income would mean that an economy is susceptible to expansion. It is therefore advisable that residents should be encouraged to invest in shares owned by foreign companies. If one considers balance on goods, services and income, it would mean that if interests and dividends received from both foreign bonds, shares, interests and dividends made to foreigners, and value of exports received from goods and services, a country would be said to have a surplus economy. This would be more beneficial to a country considering that its economy will most likely expand without struggles (Thompson, 2006).
Balance on current account pertains to the measure of the sum of balance of trade, the net factor income and the net transfer payments. The balance of trade is calculated as exports less imports of goods and services. The net factor income covers dividends and interests while transfer payments will include remittances made by individuals to family members overseas as well as government grants and charities received or made to other countries. Current account always involves goods and services that are currently utilized. If the sum of current account results to a positive value, a country would be facing growth while it would be suffering negative growth if the sum of the current account turns out to be negative.
Unlike current account, which considers only income earned from either foreign ownership of domestic assets or domestic ownership of foreign assets, capital account incorporates the change in value of assets ensuing from the sale or borrowing of assets. Perhaps, capital account can be broken down to include direct foreign investment, reserve account, portfolio investment and other investments. Direct foreign investment refers to investing in long term assets such as buildings. Portfolio account includes purchasing shares and bonds. On the other hand, reserve accounts refer to sell and purchase of foreign currencies while other investments would include deposits into bank accounts over and above loans granted by banks. The flowing of income into a country resulting from the sale of assets leads to surplus trade while the outflow of money ensuing from the sale of assets results to deficit trade (Thompson, 2006).
Thompson, H. (2006). International Economics: Global Markets and Competition. Hackensack: World Scientific Publishing.