Balance of Trade (BOT)

What is a Balance of Trade (BOT)?

Definition

Balance of trade is the difference in the value of a country’s exports and its imports. It is the most vital part of a current account. It is, therefore, the most strategic part of the balance of payments that processes all international transactions of a country. The current account is responsible for measuring all net income earned on a country’s foreign assets.

Trade Surplus Vs Trade Deficit

A trade surplus is said to occur when a country’s exports are greater than its imports. While a trade deficit is said to occur when a country’s imports are greater than its exports.

For example, if the U.S. exports $2 trillion worth of goods and services in 2019, and imports $1.2 trillion worth of goods in that same year, then the U.S. would have a trade surplus of $800 billion and vice versa.

Formula:

A balance of trade or trade balance is the difference in value between its exports and imports.

X – M = TB

Where,

X = Exports (domestically produced goods or services sold to foreigners)

M = Imports (purchased goods and services produced in a foreign country)

TB = Trade Balance

NB: A country having a large trade deficit would have to borrow money to pay for its goods and services while a country having trade surplus can lend money to countries with a trade deficit.