What is a Trade Balance?

Trade balances are evaluations of the relationship between the imports and exports of a given country. Specifically, the purpose of the trade balance is to determine if the amount of goods and services leaving the country is balancing at a reasonable level with goods and services entering the country. Properly assessing the current balance of trade for a given country provides key information about the overall economic health of that nation.

The most common method of determining the current trade balance is to determine a specific period to consider. Often, the period will be a three to six months, although it is not unusual for a full calendar year to be considered. Once the time frame is established, attention can turn to compiling figures that relate to the total amount of imported goods and services for the period cited.

After determining the cost of goods and services that entered the country during the period, the next step is to identify the cost of goods and services that were exported to other countries. The total cost of imports is subtracted from the total cost of exports in order to determine the current trade balance.

Ideally, exports would exceed imports. This would mean that the country in question generated more revenue that stayed in the country than what went out to other countries. A country that typically exports more than it imports is said to have a relatively healthy trade balance and most likely has a stable economy.

On the other hand, if imports exceed exports, more revenue is leaving the country than is coming in. This can lead to a situation known as a deficit, and is not an indicator of a stable economy. When the trade balance reflects a deficit rather than a surplus, steps should be taken to determine why more desirable goods and services are not produced within the country and take steps to correct the situation if at all possible.

It is not unusual for the trade balance to fluctuate slightly from one period to the next. Many factors can impact the balance between imports and exports. Changes in governments and seasonal factors are two common factors that can cause a shift in the trade balance. Natural disasters can also create a shift in what is imported or exported, as this factor can drastically change demand for various goods and services overnight.