Importance of balance of trade

Topics: International trade, Balance of trade, Export Pages: 5 (1533 words) Published: April 21, 2013
Importance of balance of trade

Balance of trade data is a very important piece of understanding the global puzzle of international trade, and thus, forex.  Much like an income statement, balance of trade data clearly defines whether a trade deficit or trade surplus is in play.   Why Balance of Trade Matters

Balance of trade data shows the imports and exports of goods and how a country competes in a global marketplace.  Balance of trade numbers can run a trade deficit, showing that a country imported more than it exported, or they can reflect a trade surplus, exporting more than was imported in a specific time period. 

Imports and exports can include physical goods and intangible services.  Luxembourg, which is a popular banking destination, has one of the highest per capita service exports because its banking system is used internationally.  Likewise, Middle Eastern nations have stronger physical exports due to the international oil trade. 

Just as a negative balance of trade is a bad sign for a country's long run economic health, high export figures can be equally poor for domestic trade.  China, which has for a long time been a net exporter, has fought several bouts of domestic inflation as money flows into the country from all over the world.  When the supply of money rises internally at pace faster than the relative increase in wages, internal consumption and demand can be temporarily stymied, causing recessions. 

However, all things considered, a country would much prefer to attract too much foreign export purchases than too few, as a negative balance of trade cannot be sustained forever.  In addition, negative trade increases the possibility of high national debts or inflation from the central bank to maintain domestic currency levels. Making Use of the Data

Balance of trade data is released once per month and may be revised as time passes and the numbers become clearer.  Since tallying all the exports flowing out of a country and all the imports flowing in requires a substantial amount of record keeping and manpower, these reports on trade surplus or trade deficit may be revised for years following their first release.

From a forex trading point of view, balance of trade statistics are best used in conjunction with balance of payments.  While a net importer cannot show a positive balance of trade, it can, and in many times does, show a positive balance of payments.  This is because net importers have to borrow from other countries to sustain their current consumption, and they routinely borrow more funds than are needed in a single time period or calendar year Factors that can affect the balance of trade include:

Measuring the balance of trade can be problematic because of problems with recording and collecting data. As an illustration of this problem, when official data for all the world's countries are added up, exports exceed imports by almost 1%; it appears the world is running a positive balance of trade with itself. This cannot be true, because all transactions involve an equal credit or debit in the account of each nation. The discrepancy is widely believed to be explained by transactions intended to launder money or evade taxes, smuggling and other visibility problems. However, especially for developed countries, accuracy is likely. * The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting economy vis-à-vis those in the importing economy; * The cost and availability of raw materials, intermediate goods and other inputs; * Exchange rate movements;

* Multilateral, bilateral and unilateral taxes or restrictions on trade; * Non-tariff barriers such as environmental, health or safety standards; * The availability of adequate foreign exchange with which to pay for imports; and * Prices of goods manufactured at home (influenced by the responsiveness of supply

How to calculate BOT

Trade balance shows how countries interact with each...
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