The Balance of Trade (BOT) also known as trade balance refers to the difference between the monetary value of a country’s imports and exports over a given period of time.
The BOT is normally easy to measure since all goods and many services pass through the customs office.
The trade balance is also the biggest part of the current account.
How it is calculated
A country’s trade balance equals to the value of its exports minus its imports.
Most countries use the formula, X – M = TB, where, X, M and TB stand for Exports, Imports and Trade Balance respectively.
Exports are goods or services made domestically and sold to a foreigner. Rwanda’s leading exports commodities include agricultural products, minerals among others.
On the other hand, imports are commodities and services bought by a certain country different from where it was made.
In essence, when a country’s exports are greater than its imports, it has a trade surplus. But when exports are less than imports, it has a trade deficit.
However, experts say that, this is generally a simplistic assumption, adding that a trade deficit is not inherently bad, as it can be indicative of a strong economy.
Besides, when coupled with prudent investment decisions, a deficit can lead to stronger economic growth in the future.
Majority of the countries implement trade policies that encourage a trade surplus.
This is done through selling more products and receiving more capital for their residents.
Another uncommon option is where countries resort to trade protectionism in a bid to maintain a trade surplus.
The countries defend domestic industries from foreign competition by levying tariffs, quotas, or subsidies on imports.
Meanwhile a trade deficit can be unfavourable for a nation, especially one whose economy relies heavily on the export of raw materials. Generally, such countries import a lot of consumer products.
As a result, its domestic businesses don’t gain the experience needed to make value-added products. Rather, its economy becomes increasingly dependent on global commodity prices, which can be highly volatile.
What is the difference between a trade deficit and balance of payments?
The balance of trade is the most significant component of the balance of payments.
Like the BOT, the balance of payments sums up all international investments plus net income made on those investments to the trade balance.
Reports indicate that a certain country can run a trade deficit, but still have a surplus in its balance of payments.
A large surplus in investments could offset a trade deficit. That occurs if the investment runs a huge surplus. For instance, foreigners could invest heavily in a country’s assets. They could buy real estate, own oil drilling operations, or invest in local businesses.
The capital account records assets that produce future income, such as copyrights. As a result, it would rarely run a surplus large enough to offset a trade deficit.
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