Posted in Finance, Accounting and Economics Terms, Total Reads: 251
Definition: Balance of Trade
Balance of Trade is defined as the difference in the amount of exports done by a country to the imports done by it in a given time period. It is calculated by subtracting the value of imports form the value of exports. The balance of trade is favorable when the exports exceed the amount of imports done.
If during a period, the value of exports is exceeding the value of imports then it is called favorable balance of trade and if the value of imports is exceeding the value of exports then it is called unfavorable balance of trade. A good economic condition of a country is indicated by favorable balance of trade. Following are the factors that can affect the balance of trade:
• Cost of production in the country
• Cost and availability of goods, raw materials and other inputs
• Fluctuations in the exchange rates
• Unilateral, bilateral and multilateral taxes or restrictions on trade
• Availability of foreign exchange to pay for imports
For example, if a country xyz imported $2 trillion in goods and services last year, but exported only $1500 billion in goods and services to other countries, then xyz had a negative $500 billion BOT, or a $500 billion trade deficit.