Balance of Trade (BOT)

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 given 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.

Formula

The formula for calculating trade balance is as follows:

Where:

• Value of Exports is the value of goods and services that are sold to buyers in other countries.
• Value of Imports is the value of goods and services that are bought from sellers in other countries.

Interpretation of BOT 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 of an indication regarding how well an economy is doing. Economists generally agree that neither trade surpluses or trade deficits are inherently “bad” or “good” for the economy.

A positive 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 US trade deficit has continued 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 import/export balance is hurting the economy of the United States. In fact, the US economy has been experiencing one of its longest expansions in history.

Key Takeaways

• The balance of trade refers to the difference between a country’s exports and imports.
• This trade figure alone does not provide much insight into the actual health of an economy. (The US is an example of a country with a long-standing trade deficit but that is currently experiencing one of its longest expansions in history).
• A positive BOT does not necessarily indicate a healthy economy, nor does a negative one necessarily indicate a weak economy.

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)® certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

• Barriers to Entry
• Disequilibrium
• Net Importer
• Purchasing Power Parity
• See all economics resources