Balance of Trade (BOT): Definition, Calculation, and Examples (2024)

What Is the Balance of Trade (BOT)?

Balance of trade (BOT) is the difference between the value of a country's exports and the value of a country's imports for agiven period. Balance of trade is the largest component of a country's balance of payments (BOP). Sometimes the balance of trade between a country's goods and the balance of trade between its services are distinguished as two separate figures.

The balance of trade is also referred to as the trade balance, the international trade balance, the commercial balance, or the net exports.

Understanding the Balance of Trade (BOT)

The formula for calculating the BOT can be simplified as the total value of exports minus the total value of its imports.Economists use the BOT to measure the relative strength of a country's economy.

A country that imports more goods and servicesthan it exports in terms of value has a trade deficit or a negative trade balance. Conversely, a country that exports more goods and services than it imports has a trade surplus or a positive trade balance.

A positive balance of trade indicates that a country's producers have an active foreign market. After producing enough goods to satisfy local demand, there is enough demand from customers abroad to keep local producers busy. A negative balance of trade means that currency flows outwards to pay for exports, indicating that the country may be overly reliant on foreign goods.

Calculating the Balance of Trade

A country's balance of trade is calculated by the following formula:

$\begin{aligned}&\textbf{BOT}=\textbf{Exports}-\textbf{Imports}\end{aligned}$​BOT=Exports−Imports​

Where exports represents the currency value of all goods sold to foreign countries, as well as other outflows due to remittances, foreign aid, donations or loan repayments. Imports represents the dollar value of all foreign goods imported from abroad, as well as incoming remittances, donations, and aid.

Debit items include imports, foreign aid, domestic spending abroad, and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy, and foreign investments in the domestic economy. By subtracting the credit items from the debit items, economists arrive at a trade deficit or trade surplus for a given country over the period of a month, a quarter, or a year.

Example of How to Calculate the BOT

Here's an example of how to calculate the balance of trade:

Let's say that a country's exports of goods in a given year are worth $100 million, and its imports of goods are worth $80 million. To calculate the balance of trade, you would subtract the value of the imports from the value of the exports:

Balance of trade = Exports - Imports
= $100 million - $80 million
= $20 million

In this example, the balance of trade is $20 million, which means that the country has a trade surplus of +$20 million.

It's important to note that the balance of trade is typically measured in the currency of the country whose trade balance is being calculated. For example, if the country in the above example is the United States, the balance of trade would be measured in US dollars. If the country is Japan, it would be measured in Japanese yen, and so on.

Examples of Balance of Trade

The United States imported $239billion in goods and services in August 2020 but exported only $171.9 billionin goods and services to other countries. So, in August, the United States had atrade balance of -$67.1billion, or a $67.1billion trade deficit.

A trade deficit is not a recent occurrence in the United States. In fact, the country has had a persistent trade deficit since the 1970s. Throughout most of the 19th century, the country also had a trade deficit (between 1800 and 1870, the United States ran a trade deficit for all but three years).

Conversely, China's trade surplus has increased even as the pandemic has reduced global trade. In Aug. 2022, China exported goods worth $314.9 billion and imported goods worth $231.7 billion. This generated a trade surplus of $79.4 billion for that month, a drop from $101 billion the preceding month.

Balance of Trade: Favorable vs. Unfavorable

A favorable balance of trade, also known as a trade surplus, occurs when a country exports more goods than it imports. This means that the country is earning more from its exports than it is spending on its imports, and it is generally seen as a sign of economic strength. A trade surplus can be a result of a country having a competitive advantage in the production and export of certain goods, or it can be the result of a country's currency being relatively undervalued, making its exports cheaper for foreign buyers.

On the other hand, an unfavorable balance of trade, also known as a trade deficit, occurs when a country imports more goods than it exports. This means that the country is spending more on imports than it is earning from exports, and it can be a cause for concern if it persists over a long period of time. A trade deficit can be the result of a country having a comparative disadvantage in the production of certain goods, or it can be the result of a country's currency being relatively overvalued, making its imports cheaper and its exports more expensive.

In general, a favorable balance of trade is seen as a positive sign for a country's economy, while an unfavorable balance of trade is seen as a negative sign. However, it's important to note that a trade deficit or surplus is not always a sign of economic strength or weakness, and other factors such as a country's overall economic growth, employment rate, and inflation rate should also be taken into account.

Special Considerations

Acountry with a largetrade deficitborrows moneyto pay for its goods and services, while a country with a largetrade surpluslends money todeficitcountries. In some cases, the trade balance may correlateto acountry's political and economic stability because it reflects the amount of foreigninvestmentin that country.

A trade surplus or deficitis not alwaysa viable indicator of an economy's health, and it must be considered in the contextof the business cycle and other economic indicators. For example, in a recession, countries preferto export more tocreatejobs and demand in the economy. In times of economicexpansion, countries prefer to import more to promoteprice competition, which limits inflation.

Balance of Trade vs. Balance of Payments

The balance of trade is the difference between a country's exports and imports of goods, while the balance of payments is a record of all international economic transactions made by a country's residents, including trade in goods and services, as well as financial capital and financial transfers. The balance of trade is a part of the balance of payments and is represented in the current account, which also includes income from investments and transfers such as foreign aid and gifts. The capital account, which is another part of the balance of payments, includes financial capital and financial transfers.

It's important to note that the balance of trade and the balance of payments are not the same thing, although they are related. The balance of trade measures the flow of goods into and out of a country, while the balance of payments measures all international economic transactions, including trade in goods and services, financial capital, and financial transfers.

A country can have a positive balance of trade (a trade surplus) and a negative balance of payments (a deficit) if it is exporting more goods than it is importing, but it is also losing financial capital or making financial transfers. Conversely, a country can have a negative balance of trade (a trade deficit) and a positive balance of payments (a surplus) if it is importing more goods than it is exporting, but it is also receiving a large amount of financial capital or making financial transfers.

The Bottom Line

The balance of trade is the difference between a country's exports and imports of goods. A positive balance of trade, also known as a trade surplus, occurs when a country exports more goods than it imports. This means that the country is earning more from its exports than it is spending on its imports, and it is generally seen as a sign of economic strength.

On the other hand, a negative balance of trade, also known as a trade deficit, occurs when a country imports more goods than it exports. This means that the country is spending more on imports than it is earning from exports, and it can be a cause for concern if it persists over a long period of time. The balance of trade is an important component of a country's balance of payments, which is a record of all its international economic transactions.

Correction—Feb. 8, 2023: A previous version of this article incorrectly defined a positive balance of trade and anegative balance of payments. It has been edited to reflect that a positive balance of trade and negative balance of payments occurs when a country is exporting more goods than it is importing.