Balance of trade (BOT) / Trade balance

Imports and exports of cars to show currency strength

What is a balance of trade (BOT) / trade balance?

A country's trade balance, or balance of trade (BOT), is the difference in value between its exports and imports over a given period of time.

If the value of a country's imports exceeds that of its exports (a negative balance), it is said to have a 'trade deficit'. If the reverse is true (a positive balance), it is said to have a 'trade surplus'.

The trade balance forms part of a country's overall current account, which calculates the difference between a country's total savings and investments.

It is also referred to as 'balance of trade (BOT)', 'commercial balance and 'net exports (NX)'.

How does a trade deficit or surplus affect an economy?

Depending on the economic conditions, a trade deficit is not always a bad thing. For example, if a country's economy is booming, increasing imports can help to meet demand for goods and services, or introduce greater competition on prices.

During a recession, however, countries generally prefer to increase exports with a view to generating jobs domestically and increasing demand for domestic goods and services. A trade deficit in this climate would be negative for the economy overall.

Likewise, a trade surplus is not always positive and could indicate that the country is under-utilising the means at its disposal i.e. hoarding funds that could be used to further contribute to the total wealth of that country.

Developing countries in particular can struggle to maintain a positive trade balance (surplus) in tough economic times. This is usually because they have to pay a high price to import finished goods but receive a much lower price for the raw materials that they export.

Read more about the trade balance and how economic indicators can affect the value of a currency:

Lesson
Learn about further economic indicators that affect the value of a currency and how they can be used to determine the likely value of a currency.
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