Question

What is meant by Balance of Trade ?

Hint:

A deficit in the Balance of Trade (goods) can often be offset by a surplus in the Balance of Services (invisibles) in the overall Current Account.

Answer 1

Step 1: Understanding the Concept:
Balance of Trade is also known as the "Trade Balance" or "Merchandise Balance."
It is a specific component of the Current Account within the broader Balance of Payments (BOP).
Step 2: Key Formula or Approach:
The formula for calculating the Balance of Trade is:
\[ \text{BOT} = \text{Value of Visible Exports} - \text{Value of Visible Imports} \]
Step 3: Detailed Explanation:
The term "visible" refers to physical commodities that can be seen, touched, and recorded by customs at the borders.
There are three possible states for BOT:
1. Surplus: When exports of goods exceed imports (\(X>M\)). This is considered favorable.
2. Deficit: When imports of goods exceed exports (\(M>X\)). This is considered unfavorable.
3. Balanced: When the value of exported goods exactly equals the value of imported goods.
Note that BOT does not include "invisible" items like services (banking, insurance, tourism) or transfer payments.
Step 4: Final Answer:
Balance of Trade is a record of a country's trade in physical goods with the rest of the world over a specific period, usually a year.