Balance of Trade

What is Balance of Trade?

Balance of Trade refers to the net difference between a company’s exports and imports. It’s the largest component that shapes up a country’s balance of payments. Debit items may include foreign aids, imports, domestic investment in foreign land, and domestic spending in foreign land.

Meanwhile, credit items usually include foreign spending in the domestic economy, foreign investment in the domestic economy and exports.
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A country experiences a trade deficit if it needs to import more than it exports; while the opposite, (imports outweighed by the exports) is a trade surplus.

Balance of trade is sometimes also referred to as “international trade balance” or simply “trade balance”.

It is important to note here that the balance of trade is undoubtedly one of the most miscomprehended indicators in the economy of the United States. For example, a lot of people out there strongly believe that trade deficit is always a terrible thing – a curse to the economy, so as to say. However, the fact of the matter is that whether or not a trade deficit is a bad thing, is relative to the overall business cycle and the economy. For example, a trade deficit can emerge as a positive thing during an expansion, whereas it can prove to be major cause of worry during recession.

 Edited and Updated 08th January 2014

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