Understanding the Balance of Trade: Definition, Calculation, Favorable vs Unfavorable, and Special Considerations

We’re also a community of traders that support each other on our daily trading journey. In addition to official sources, many financial news outlets and economic research organizations provide access to Balance of Trade data and analysis. The Balance of Trade data is typically sourced from a country’s official statistical agency, such as the Bureau of Economic Analysis (BEA) in the United States, or the Office for National Statistics (ONS) in the United Kingdom. Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.

1. The resulting surplus creates a net inflow of foreign currency, which can be used to pay for various expenses, including debt obligations, capital investments, and improving infrastructure.
2. This indicates a positive inflow of money, shown by the balance of trade being a positive number.
3. A country may only be able to borrow a lot to run that deficit if it is deemed dependable and creditworthy.
4. The balance of trade is one of the key metrics to know the economic stability of the country.
5. The context matters—a trade deficit financed by foreign investment in productive sectors might be beneficial, while a surplus resulting from depressed domestic demand might signal underlying economic issues.

How Do Global Economic Shocks Impact a Country’s Balance of Trade?

A country’s natural resources can have a significant impact on its balance of trade. Abundant and valuable natural resources such as minerals, oil, gas, agricultural products, and timber can generate substantial export revenues. These exports contribute positively to the trade balance by bringing in foreign exchange. The trade surplus indirectly helps in improving the overall economy of the country. Mercantilism advocates protectionist measures, such what is the balance of trade as tariffs and import quotas.

Do you already work with a financial advisor?

An increase in foreign debt can negatively impact a country’s credit rating and its ability to borrow money in the future. High levels of foreign debt can also result in higher interest payments, which can further increase the burden on the economy. This is especially true when a country heavily relies on imports of essential goods, such as food, energy, or technology. In this case, it can be a vulnerability, and it may be used as leverage to gain influence over the country. Options trading entails significant risk and is not appropriate for all customers. Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies.

What are the negative effects of a trade deficit on a country’s economy?

On the other hand, a trade deficit can suggest a vibrant domestic market with high consumer demand, potentially leading to increased borrowings and debt. While deficits are not inherently harmful, prolonged large deficits may weaken a country’s currency, affect employment in industries facing international competition, and lead to challenging economic adjustments. Income levels, both domestically and in trading partner countries, significantly impact a country’s balance of trade. Both macroeconomic factors affect consumer demand for goods and services and the relative affordability of imports and exports. A favorable balance of trade, or trade surplus generally occurs when the country’s exports are more than the imports for that particular period. This implies that the country is generating more income from exports to other countries.

Economic sentiment and perceptions of risk can negatively influence trading behaviors. Increased export competitiveness can be achieved through more efficient production processes, higher product quality, and the development of advanced goods and services. In addition, a country can diversify by trading with a more diverse set of customers.

If the current account is in surplus, the country’s net international asset position increases correspondingly. When the price of one country’s currency increases, the cost of its goods and services also increases in the foreign market. For residents of that country, it will become cheaper to import goods, but domestic producers might have trouble selling their goods abroad because of the higher prices.

Although these measures may reduce the deficit in the short run, they raise consumer prices. Along with this, such actions trigger reactionary protectionism from other trade partners. International trade organizations, such as the World Trade Organization (WTO), typically limit tariffs and trade barriers, so attempting to enter into a balanced trade agreement would run afoul of membership agreements. Countries need to identify their competitive advantage and develop policies that support their export industries. However, the picture changed in 2018 when the Australian government closed the phosphate mine on Christmas Island.