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Balance of trade

Balance of trade Definition

Balance of trade figures are 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 payments, 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, e.g. the service economy.

A positive balance of trade is known as a trade surplus and consists of exporting more (in financial capital terms) than one imports. A negative balance of trade is known as a trade deficit and consists of importing more than one exports. Neither is necessarily dangerous in modern economies, although large trade surpluses or trade deficits may sometimes be a sign of other economic problems.

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.

Trade deficit
Trade surplus

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