The trade balance what it is and how it is calculated

The trade balance: what it is and how it is calculated

The trade balance is the record of imports and exports of a country in a given period. It is also called the balance of goods.

Through the trade balance, income from the sale of national goods abroad and expenses from the purchase of foreign goods are recorded and compared. In other words, the trade balance allows recording the value of a country’s exports and imports.

The trade balance serves to understand market supply and demand, as well as to identify possible signs of economic expansion or contraction.

Its importance lies in the fact that it helps to understand the economic potential of a country in relation to others, useful information to determine with which countries to establish trade relations or in which areas to invest.

The balance of the trade balance can be positive or negative, in which case we speak of a trade surplus or a trade deficit respectively. When the balance tends to zero, it is said that there is balanced trade.

How to calculate the balance of the trade balance?

It is calculated with a simple subtraction operation between the total income from exports and expenses from imports.

The formula is as follows:

Exports – Imports = balance of trade balance

For example: in 2019, the country registered revenues of 911,894.2 million dollars from exports. It also recorded expenses for imports of 917,456.1 million dollars. So if we apply the formula we get the following result:

911.894,2 M.$ – 917.456,1 M.$ = -5.561,9 M.$

Therefore, the country’s trade balance in 2019 was -5,561.8 M. €. It is, therefore, a negative balance of the trade balance or deficit.

Variables that affect the balance

Although it allows us to get a fairly approximate idea of the economic direction of a country, by itself it is not a sufficient indicator to interpret the behavior of the general economy.

This is because, on the one hand, it only reflects one aspect of the economy and, on the other hand, this aspect is affected by various variables.

Among some of the variables that affect it we can mention:

  • The consumption preferences of the population with respect to national and foreign products.
  • The sale price to the consumer of imported products.
  • The average income of consumers from imports or exports.
  • Government policies regarding foreign trade.

Balance of payments

The balance of payments consists of the total record of commercial operations, services, and movement of capital between a country and the countries with which it has commercial relations.

The trade balance is one of the components of the balance of payments, and it is the most important since it is an indicator of the country’s commercial functioning.

Other components of the balance of payments are the income balance, the transfer balance, and the services balance.

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