Balance of trade (BOT) is the difference between the value of a country’s exports and the value of a country’s imports for a given period. Balance of trade is the largest component of a country’s balance of payments (BOP). Sometimes the balance of trade between a country’s goods and the balance of trade between its services are distinguished as two separate figures.
The balance of trade is also referred to as the trade balance, the international trade balance, the commercial balance, or the net exports.
Understanding the Balance of Trade (BOT)
The formula for calculating the BOT can be simplified as the total value of exports minus the total value of its imports. Economists use the BOT to measure the relative strength of a country’s economy.
A country that imports more goods and services than it exports in terms of value has a trade deficit or a negative trade balance. Conversely, a country that exports more goods and services than it imports has a trade surplus or a positive trade balance.
A positive balance of trade indicates that a country’s producers have an active foreign market. After producing enough goods to satisfy local demand, there is enough demand from customers abroad to keep local producers busy. A negative balance of trade means that currency flows outwards to pay for exports, indicating that the country may be overly reliant on foreign goods.
Calculating the Balance of Trade
A country’s balance of trade is calculated by the following formula:
BOT=Exports−Imports
Where exports represent the currency value of all goods sold to foreign countries, as well as other outflows due to remittances, foreign aid, donations, or loan repayments. Imports represent the dollar value of all foreign goods imported from abroad, as well as incoming remittances, donations, and aid.
Debit items include imports, foreign aid, domestic spending abroad, and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy, and foreign investments in the domestic economy. By subtracting the credit items from the debit items, economists arrive at a trade deficit or trade surplus for a given country over the period of a month, a quarter, or a year.
Example of How to Calculate the BOT
Here’s an example of how to calculate the balance of trade:
Let’s say that a country’s exports of goods in a given year are worth $100 million, and its imports of goods are worth $80 million. To calculate the balance of trade, you would subtract the value of the imports from the value of the exports:
Balance of trade = Exports – Imports
= $100 million – $80 million
= $20 million
In this example, the balance of trade is $20 million, which means that the country has a trade surplus of +$20 million.
It’s important to note that the balance of trade is typically measured in the currency of the country whose trade balance is being calculated. For example, if the country in the above example is the United States, the balance of trade would be measured in US dollars. If the country is Japan, it would be measured in Japanese yen, and so on.
Examples of Balance of Trade
The United States imported $239 billion in goods and services in August 2020 but exported only $171.9 billion in goods and services to other countries. So, in August, the United States had a trade balance of -$67.1 billion, or a $67.1 billion trade deficit.
A trade deficit is not a recent occurrence in the United States. The country has had a persistent trade deficit since the 1970s. Throughout most of the 19th century, the country also had a trade deficit (between 1800 and 1870, the United States ran a trade deficit for all but three years).
Conversely, China’s trade surplus has increased even as the pandemic has reduced global trade. In Aug. 2022, China exported goods worth $314.9 billion and imported goods worth $231.7 billion. This generated a trade surplus of $79.4 billion for that month, a drop from $101 billion the preceding month.