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 a given 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.

KEY TAKEAWAYS

 Balance of trade (BOT) is the difference between the value of a

country's imports and exports for a given period and is the largest
component of a country's balance of payments (BOP).
 A country that imports more goods and services than it exports in terms
of value has a trade deficit while a country that exports more goods and
services than it imports has a trade surplus.
 Viewed alone, a favorable balance of trade is not sufficient to gauge the
health of an economy. It is important to consider the balance of trade
with respect to other economic indicators, business cycles, and other
indicators.
 The United States regularly runs a trade deficit, while China usually
runs a large trade surplus.
Investopedia / Matthew Collins

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 services than 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:

BOT=Exports−ImportsBOT=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 $239 billion in goods and services in August
2020 but exported only $171.9 billion in goods and services to other
countries. So, in August, the United States had a trade balance of -
$67.1 billion, or a $67.1 billion 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).1

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.2

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
A country with a large trade deficit borrows money to pay for its goods and
services, while a country with a large trade surplus lends money
to deficit countries. In some cases, the trade balance may correlate to
a country's political and economic stability because it reflects the amount of
foreign investment in that country.

A trade surplus or deficit is not always a viable indicator of an economy's

health, and it must be considered in the context of the business cycle and
other economic indicators. For example, in a recession, countries prefer to
export more to create jobs and demand in the economy. In times of
economic expansion, countries prefer to import more to promote price
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.