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Balance of trade

Balance of trade figures 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 international investment.

The figures are usually split into visible[?] and invisible balance figures. The visible balance represents the physical goods, and invisible represents other forms of trade, e.g. services.

If the balance of trade is positive, then the economy has received more money than it has spent. 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. This led to huge Japanese overseas purchases of items such as real estate, which were of questionable economic usefulness. 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.

Negative balances are not necessarily terrible news, either. Paul Samuelson has argued that the consistent negative balance of trade that exists in the United States is due to confidence in the United States' currency. Because the United States dollar is generally regarded to be extremely stable, dollars which are exported are held by persons overseas and there is no pressure to return them to the United States. So essentially the United States is able to export pieces of paper and get real goods and services in return.

Factors that can affect the balance of trade figures include:

  • Prices of goods manufactured at home (influenced by the responsiveness of supply)
  • Exchange rates
  • Trade agreements/barriers

Measuring the balance of payments can be problematic, due to problems with recording and collecting data. As an illustration of this problem, when official data for all countries in the world is added up it appears that the world is running a positive balance of payments with itself. The total reported amount of exports in the world is greater by a few percent than the total reported amount of imports. 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, and other data problems.

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