Global trade contributes greatly to the development of any country. The more the country invests and trades, the more it grows, but trade can have both loss and profit. It depends on our understanding, needs and market conditions. So through this article we are going to give you information about the balance of trade.
Balance of trade?
In simple words, the balance of trade is the value of trade in a country. That is, the trade balance is calculated by subtracting imports from the total exports. The balance of trade plays an important role in calculating the balance of payments of a country. It helps economists and experts to determine the state of a country’s economy.
India’s trade balance
Reports related to the import and export of the Indian economy are published every month by the Ministry of Commerce. India’s economic growth is primarily assessed through India’s trade with the US, the European Union and China. According to the report, India imported US $ 36.89 billion in September 2019, which is 13.85 percent less than in August 2018. At the same time, exports of US $ 26.03 billion in September 2019, showing a negative growth of 6.57 percent as compared to exports of US $ 27.87 billion in September 2018. The trade balance of a country shows how a country earns a foreign currency and later spends it.
Importance of balance of trade
Trade balance is an important component. It helps economic analysts to estimate the number of goods sold abroad and the number of goods purchased from these nations to meet the needs of Indian citizens. Importing and exporting goods creates two conditions, which are –
Loss in balance of trade – When the value of imports exceeds the total value of exports in a given year, it is called trade deficit. Due to high imports, there is a shortage of foreign exchange in the country.
Trade balance surplus – It happens when the value of exports in one year is more than the total value of imports of the country. Therefore the balance of trade is used to determine the economic condition of the country compared to other nations. Trade balance is considered an important factor in the country’s current account. The trade balance account is the largest factor for the balance of payments when analyzing international transactions. The balance of trade is used to estimate the economic and political stability of a country based on the state of foreign investment in the country.
Types of trade balance
The balance of trade can be mainly divided into two types, which are –
Favorable trade balance
A favorable trade balance is a situation when a country’s exports exceed its imports. Most countries want to maintain a favorable trade balance and for this they also take various measures. This is done because it helps foreign countries to make profit by selling more products. In countries with favorable trade balance it helps to raise the standard of living of the people and increase the income of the people.
Adverse trade balance
As we know, an increase in imports over exports creates an adverse trade balance. This leads to loss of trade. Trade deficit countries export raw materials and a large number of consumer products. Due to this, the economy of a country becomes dependent on global commodity prices and the economy is not strong.
Trade balance calculation
The following equation is used to calculate the trade balance of a country –
Here X means export, M imports and TB means trade balance.
Export of goods and services produced by a country to another country is called export. Any country can export physical goods such as clothes, shoes, metals, food items etc. and services like banking, business, software services etc. On the other hand, imports mean buying goods and services produced in another country by citizens of another country or by the government. When exports exceed imports, trade is surplus. It is considered a favorable trade balance, but it is not always good for a country.
Trade balance component
Now let us look at the three components of the balance of trade. These indicators are mainly used to calculate trade output. The calculation may result in a trade deficit or trade surplus. Analyzing the balance of trade estimates the country’s cash outflows and inflows.
The current account is used to record the inflow and outflow of goods between nations. Records of all exported and imported goods are kept in current account. It consists of raw materials and manufactured goods. That is, all types of transactions are included in it.
A financial account is important in evaluating the change of domestic ownership of foreign property and foreign ownership of domestic property. When foreign ownership is higher than domestic ownership, it results in a deficit in the financial account. Thus the analysis of changes in the financial account determines whether the country is selling or acquiring assets.
The account, which measures financial transactions between countries, is known as a capital account. This includes the effect of taxes and the purchase and sale of property.