Balance of Trade

What Is Balance of Trade?

The balance of trade is a country's exports minus its imports of goods and services over a period. When the figure is positive, the country runs a trade surplus; when it is negative, it runs a trade deficit. The balance of trade is the largest and most closely watched component of the broader current account within the balance of payments. In the United States, the official monthly report on international trade in goods and services is published jointly by the Census Bureau and the Bureau of Economic Analysis. Trade statistics distinguish goods, which are physical products, from services, which are intangible items such as tourism, transport, finance, and licensing.

Why It Matters

The balance of trade appears directly in how national output is measured. In the GDP expenditure equation, GDP = C + I + G + (X - M), the balance of trade is the net exports term, X minus M. When imports exceed exports, that term is negative and subtracts from measured GDP. Because trade balances move with exchange rates, relative growth rates, and saving patterns, they are a key gauge economists use to understand how a country fits into the world economy. Monthly trade balance releases can move currency and bond markets, and they feature heavily in political debates over trade policy, even though a single month's figure is volatile and easily distorted by shifts in timing or commodity prices.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• How is a country's "balance of trade" calculated?
  Exports minus imports
• Why do economists caution that a trade deficit is not automatically evidence that a country is "losing" at trade?
  It is an accounting balance, not a profit-and-loss figure, and it is mirrored by investment inflows from abroad