The trade balance (BOT), also known as the trade balance, refers to the difference between the monetary value of a country’s imports and exports over a given period of time.
The BOT is normally easy to measure since all goods and many services pass through the customs office.
The trade balance is also the largest part of the current account.
How it is calculated
A country’s trade balance is equal to the value of its exports minus its imports.
Most countries use the formula X – M = TB, where X, M, and TB represent exports, imports, and trade balance, respectively.
Exports are goods or services produced in the country and sold to a foreigner. Rwanda’s main export products include agricultural products, minerals, among others.
On the other hand, imports are products and services purchased by a certain country different from the one where they were produced.
Essentially, when a country’s exports are greater than its imports, it has a trade surplus. But when exports are lower than imports, it has a trade deficit.
However, experts say this is generally a simplistic assumption, adding that a trade deficit is not inherently bad, as it can be a sign of a strong economy.
Furthermore, when coupled with prudent investment decisions, a deficit can lead to stronger economic growth in the future.
The majority of countries implement trade policies that encourage a trade surplus.
This is done by selling more products and receiving more capital for their residents.
Another uncommon option is where countries resort to trade protectionism in an attempt to maintain a trade surplus.
Countries defend domestic industries from foreign competition by imposing tariffs, quotas or subsidies on imports.
Meanwhile, a trade deficit can be unfavorable for a nation, especially one whose economy relies heavily on the export of raw materials. Usually these countries import a lot of consumer products.
As a result, its domestic enterprises do not acquire the experience necessary to manufacture value-added products. On the contrary, its economy is becoming increasingly dependent on world commodity prices, which can be very volatile.
What is the difference between a trade deficit and a balance of payments?
The trade balance is the most important component of the balance of payments.
Like the BOT, the balance of payments adds all international investments plus the net income earned on these investments to the trade balance.
Reports indicate that a certain country may have a trade deficit, but still have a surplus in its balance of payments.
A large surplus of investment could offset a trade deficit. This happens if the investment generates a huge surplus. For example, foreigners could invest heavily in the assets of a country. They could buy real estate, own oil drilling operations, or invest in local businesses.
The capital account records assets that produce future income, such as copyright. As a result, it would rarely generate a surplus large enough to offset a trade deficit.