The concept of trade balance is used a lot in the economic field and plays an important role in the economic development of the country. So What is the balance of trade? What is the calculation formula and factors affecting the balance of trade? Find out more details in the article below.
What is Trade Balance?
Balance of trade is defined as the difference between exports and imports of goods, also known as net exports or trade surplus. It reflects the change in exports and imports and the difference between them over a given period of time.
- The difference is less than zero: the trade balance is in deficit.
- Zero difference: the balance is in equilibrium.
Trade balance affects gross domestic product, people’s employment and external balance. Therefore, the trade balance represents economic growth and is the primary concern of the government.
Trade Balance Formula
With the definition of trade balance as the difference between exports and imports, from which we have the formula to calculate the trade balance as:
Trade balance = Export value – Import value
What Is The Role Of The Trade Balance For The Economy?
Trade balance plays an extremely important role in a country’s economy:
- Helping governments of other countries recognize the difference between exports and imports to promptly make policies and change plans for stability and long-term development.
- Shows the supply and demand for the country’s currency and the change in the exchange rate of the local currency to the foreign currency.
- Show the development and economic competitiveness of the country with other countries in the region and around the world.
- Shows a country’s level of investment, income, and savings. If the trade balance is negative, the country spends more than it receives, and invests more than it saves.
Factors Affecting Trade Balance
There are six basic factors that affect a country’s trade balance:
- Import: Imports will increase when gross domestic product increases, GDP value increases. In addition, if the domestic price of goods increases relative to the price in the international market.
- Export: The value of one country’s exports is the value of another’s imports. Therefore, exports depend on the prices of goods in the markets of the trading countries.
- Exchange rate: The exchange rate has a direct impact on the prices of domestically produced goods and on the international market. That is, if the exchange rate of this country’s currency rises, the price of imports will increase and the price of exports will decrease, and net exports will decrease.
- Exchange rate: is the ratio between the export price and the import price.
- Income: If the income of domestic people increases, the demand for consumption and imports of goods increases. If the income of another country increases, the demand for imports increases, leading to an increase in the amount of goods exported by the partner countries.
- Trade policies and economic development: Tax policies and goods protection will limit imports. Economic development policies will have an impact on export value. This has an impact on a country’s trade balance.
Causes of Trade Balance Deficit
There are 5 causes of trade balance deficit, which are due to inflation, budget deficit, import-export structure, or the difference between saving and investment or import tax reduction policy. As follows:
The Difference Between Savings And Investments
When the government loosens monetary policies, the interest rate on domestic capital decreases, leading to an increase in domestic investment. However, people have low savings, consume too much and save little.
Due to High Inflation
Inflation increased, commodity prices increased, and the value of money decreased, leading to a deficit in the trade balance.
Due to Budget Deficit
The current situation in Vietnam is the economic recession, the government has set out policies to stimulate economic growth, so it is forced to increase budget spending. Many investment projects are rampant and ineffective, leading to budget deficits and current account deficits.
Due to the Structure of Import and Export Goods
For the market economy in Vietnam, the export ratio and the import ratio increase at the same time, the competitiveness of domestic goods is low, leading to a deficit in the trade balance.
Import Tax Reduction Policy
The government has committed in the trade agreement and the WTO to reduce import duties. Therefore, the trade balance also has an influence.
What is balance of trade? The balance of trade is the difference between exports and imports of goods over a certain period of time. Trade balance affects the economic development of the country.
Information edited by: lamchutaichinh.vn