Balance of trade
The balance of trade is the tool used to be able to compare the value that exists between a country's goods and services exports and its importations. When exports are greater than imports, what is known as a trade surplus is presented and this situation is seen by most nations as a favorable balance of trade. On the contrary, when the value of imports exceeds the value of exports, then we are talking about a trade deficit. Countries generally consider it to be an unfavorable balance of trade. In order to determine whether a country really has a positive balance of trade, three key questions must be answered:
- What part of the economic cycle is the country in?
- How long has the deficit or surplus been in place?
- What are the reasons for this?
What is balance of trade?
Also known as the net export balance, balance of trade is the difference between the value of money between the exports and imports of a country's economy for a given period, measured in the currency of that economy.
How the balance of trade is calculated
The balance of trade is calculated by calculating the balance of it through calculations to know the difference between exports and imports made by a given country, in other words, the difference between the value of goods that a country can and sells abroad and the value of goods that it buys from other foreign countries.
Types of balance of trade
There are different types of balance of trade, for example:
- Services balance: is the record of payments made by inhabitants from one country to another that is located abroad.
- Transfer Balance: This is the income and payments that are made with current transfer between private and government property.
- Current account balance: It is the type of balance responsible for breaking down purchases and sales of goods and services with respect to other places. It is the summary of export and import transactions.
- Balance of payments: it is an indicator of macro economy that provides us with information regarding the situation of the economy of a country in a very general way and allows us to know the income that enters a country and that comes from the rest of the world and also the payments that are made by the country with respect to imports and exports.
- Income balance: it is an accounting document where all the operations derived from the trade of goods and services between some countries and others can be registered.
- Financial balance: It is the type of balance that is in charge of collecting the loans that certain country has requested abroad. It also includes investments and deposits of foreign countries that are made in a country. It is responsible for compiling the variation between the assets and liabilities of a country’s finances.
Positive and negative balance of trade
There are two types of balance of trade depending on the results it gives, and they are:
- Trade surplus: this difference is the one that occurs when the balance is favorable and has positive results. It means that the sales made abroad far exceed the purchases made. It can be said that this is the situation that all countries would like to go through.
- Trade deficit: This happens when the balance of trade is very unfavorable. Imports are larger and more important than the sales a country can make abroad in a given period. As a result of this trade deficit, the country must start looking for money to buy goods and services, which causes a negative effect that increases the exchange rate, currencies and costs.
- Spain: During 2017, Spain had a deficit in its balance of trade. This deficit is mainly due to the increase in imports, which is much higher than the quantity of products exported to the country. This deficit has been increasing more and more in Spanish commerce with the countries with which it trades.
- Colombia: In this country, the balance of trade deficit during 2017 was reduced by 44%, which is very advantageous for the country. This surplus represented approximately 485.5 million dollars, which has not been present in the country for more than two years.
- Mexico: During 2016, this country had a negative balance of trade with large losses of millions.
Written by Gabriela Briceño V.