Balance of trade

Balance of trade figures, also called net exports (NX), are the sum of the money gained by a given economy by selling exports, minus the cost of buying imports. They form part of the balance of payments, which also includes other transactions such as the international investment position.

Economic Impact of Balance of Trade

If the balance of trade is positive, then an economy exported more than it has imported. This may appear to be a good thing but may not always be so. An example of an economy in which a positive balance of payments is generally regarded as a bad thing is Japan in the 1990s. Because Japan had a consistently positive balance of payments, it had more currency than it could effectively invest, and it was reluctant to also offer full access to its own markets. This led to huge Japanese overseas purchases of items such as real estate, which were of questionable economic value. Furthermore, the protectionist measures that created the positive balance of trade also caused the price of goods in Japan to be much higher than they would have been had imports been freely allowed. The foreign currency Japanese companies earned overseas remained largely unconverted into yen in order to suppress the yen's value, further preventing Japanese consumers from benefiting from a vaunted "trade surplus".It is also possible for the terms of trade to be lower than before if there is an improvement in the balance of trade.

Related Topics:
Japan - 1990s

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Negative balances are not necessarily terrible news, either. By economic definition, a persistent trade deficit can only exist if there is a corresponding capital surplus. Otherwise, the currency would naturally decline until the deficit were eliminated.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~