The Effect of Trade Balance on National Income Growth

Topics: International trade, Export, Balance of trade Pages: 6 (1728 words) Published: September 30, 2010
The attainment of balance of trade is always a critical factor in the economic development of many nations. This simply means that continuous trade deficits and surpluses are undesirable. The world has become a global village in which different countries interact with themselves and get involved in business transactions and trade. This kind of trade between countries is known as international trade which involves the exchange of goods and services between nations. Some countries are more or less deficit nations which mean they import more than they export, while some countries produce more than is absorbed by their domestic economy so they export the surpluses. Either of these actions means that a nation is going to have a trade deficit or a trade surplus. Thus, this work is done to examine and find out how the growth of National Income can be affected by trade balance.

Every country wants to be just an exporter of goods and services. But since no man is an island, no matter how much exports a country makes, it still has to import at some point. Using the national income identity,

Y = C + I + G + (X – M)
Y = National income or GDP
C = Consumption
I = gross investment
G = Government expenditure
X = Exports and,
M = Imports.
From the equation above, the GDP of a country is dependent on consumption, investment, government spending and net exports. Other variables apart, this paper focuses on how exports and imports affect the GDP. Having a high GDP is the aim of every nation but having the right mix of exports and imports is the problem. Some countries live beyond their means by importing more than they export while some export more than they import. Based on this, this study is conducted to find solutions to the problem which has been identified.

The objective of this study is to determine;
1.If trade deficit and surpluses have a positive effect on GDP 2.If maintaining a trade balance yearly will cause an increase in the Growth of national income 3.How trade balance affect GDP growth.

1.Does a trade deficit or trade surplus have a positive effect on GDP?
2.Must a trade balance be maintained yearly to increase National Income?
3.Does trade balance significantly affect National Income growth?

This study is meant to increase knowledge in this field and to aid the government in making efficient decisions on how much imports and exports should be made.

Trade balance (or net exports) is the difference between the monetary value of export and imports or output in an economy over a certain period. It is the relationship between a nation’s imports and exports. A favourable or positive balance of trade is known as a trade surplus. If it consists of exporting more than is imported, a negative or unfavourable balance is referred to as a trade deficit. The balance of trade is sometimes divided into goods-and-services balance. The balance of trade forms part of the current account, which includes other transactions such as income from the international aid. If the current account is in surplus, the country’s net international asset position increases correspondingly.

Factors That Affect Trade Balance
1.The cost of production (land, labour, capital, taxes etc) in the exporting economy vis-a-vis those in the importing economy. 2.The cost and availability of raw materials, intermediate goods and other inputs.

3.Exchange rate movements
4.Non-tariff barriers such as environmental, health or safety standards.
5.The availability of adequate foreign exchange with which to pay for imports and
6.Prices of goods manufactured at home (influenced by the
responsiveness of supply).

Having said that trade deficits means producing...
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