balance of trade definition

Balance of Trade Definition with Example

Balance of Trade Definition – “Difference between countries exports and imports during a given period of time”

It is one of the element in the current account of BOP. In case, exports are more than the imports, then it is known as trade surplus or favorable BOT (balance of trade). However, if imports are greater than exports, then it is known as unfavorable BOT.

Imports refers to the goods and services that are manufacture in a foreign country and purchase by the residents of domestic country. On the other hand, exports refers to the selling of goods and services manufacture in domestic country to the foreign country.

Favorable Balance of Trade

Each and every country in this world always wants to increase their exports. As increase in exports results in flow of money and foreign exchange in the country. All the countries make policies or channelize their efforts for increasing their exports comparatively to their efforts. It is just like making profit for a country.

A favorable balance of trade results in increasing the employment level in the country, increase in the income, higher standard of living and ultimately resulting in increasing the national income of the country. In order to achieve this, countries protect domestic industries by levying tariffs, quotas on imports. To increase the exports, provides subsidies and rebates.

Favorable BOT = Exports > Imports

Unfavorable Balance of Trade

To understand balance of trade definition, it is very important to know unfavorable BOT. When the imports of a country exceeds the export it is unfavorable trade or trade deficit. The entire economy depends upon the other countries for the products and commodities. This results in flow of lots of foreign exchange of the country. In addition to this, domestic industries are on the verge of disappearance.

Unfavorable BOT = Imports > Exports

Balance of Trade Vs Balance of Payment

Balance of Trade is a small subset of Balance of Payment. It is possible that balance of trade is showing trade deficit, however there is surplus in BOP. Other items in it can be used to finance the trade deficit in BOT.

Related Financial Terms of Balance of Trade