Balance of Trade (BOT) is regarded as the difference between the value of export and Import of a country for a specific period of time. BOT is the largest part of a country’s balance of payments (BOP).
BOT is also known as the international trade balance or trade balance and is used by economists to evaluate the strength of a country’s Economy. If a country is importing more than exporting, it has a trade deficit. On the contrary, if a country is exporting more than importing, it has a trade surplus.
There are several countries that have a certain trade deficit and surplus. For instance, China is a country that produces several products and exports them to the world. Thus, it has recorded a trade surplus since 1995.
A balance of trade deficit or surplus are not always considered important indicators to assess the economy of a country. However, these two factors should be present in a business cycle amidst others.
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Let’s consider a balance of trade example here. If a country is dealing with the Recession, it exports more to increase demand and jobs in the country. During an economic expansion, the same country would prefer importing more to promote competition in pricing; thus, restricting Inflation.
The balance of trade formula is simple enough to measure:
The total value of imports – the total value of exports
Let’s take an example here. Suppose that India imported 1.5 trillion of goods and services in 2019. However, the exporting only stood at 1 trillion in the same year. This way, the trade balance will be -500 billion, and the country is facing a trade deficit.
Moreover, if a country has a large trade deficit, it may borrow money to pay for services and goods. On the other hand, a country that has a large trade surplus can lend money to countries dealing with the deficit.
This way, there are credit and debit items that are a part of the balance of trade. While credit items comprise foreign spending, foreign investment and exports in a domestic economy; the debit items are all about foreign aid, imports, domestic investments abroad and domestic spending abroad.
By taking out credit items from the debit items, a trade surplus or a trade deficit can be calculated for a country within a period of time, be it a month, a quarter, or a year.