What is the Balance of Trade (BOT)?
The balance of trade (BOT), also known as the trade balance, refers to the difference between the monetary value of a country’s imports and exports over a certain time period. A positive trade balance indicates a trade surplus while a negative trade balance indicates a trade deficit. The BOT is an important component in determining a country’s current account.
Balance of Trade Formula
The formula for calculating trade balance is as follows:
- Value of Exports is the value of goods and services that are sold to other countries.
- Value of Imports is the value of goods and services that are bought from other countries.
Interpretation of Balance of Trade for an Economy
To the misconception of many, a positive or negative trade balance does not necessarily indicate a healthy or weak economy. Whether a positive or negative BOT is beneficial for an economy depends on the countries involved, the trade policy decisions, the duration of the positive or negative BOT, and the size of the trade imbalance, among other things.
In short, the BOT figure alone does not provide much context regarding how well an economy is doing. Economists generally agree that neither trade surpluses or trade deficits are “bad” or “good” for the economy.
A positive trade balance occurs when exports > imports and is referred to as a trade surplus.
A negative trade balance occurs when exports < imports and is referred to as a trade deficit.
The Balance of Trade between the United States and China
The United States’ trade deficit with China remains a highly debated topic among policymakers and academics. The trade deficit between the two countries continues to rise over the years, increasing to a five-month high in July 2018.
To many, the issue may seem problematic. However, there’s been no strong evidence that a negative balance of trade is hurting the economy of the United States. In fact, the US economy’s been experiencing one of its longest expansions in history.
- The balance of trade refers to the difference between a country’s exports and imports.
- The trade balance figure alone does not provide much context into the actual health of an economy. (The US is an example of a country with a long-standing trade deficit but is currently experiencing one of its longest expansions in history).
- A positive BOT does not necessarily indicate a healthy economy, and a negative BOT does not necessarily indicate a weak economy.
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