Definition: The trade balance is the difference between the value of a country’s exports and imports of goods over a period of time.
Exports (X) – these are goods and services made in one country and then sold to other countries.
Exports bring money into the country to boost economy (otherwise known as an injection).
Examples:
– Cars sold abroad
– Machinery exported to other countries
– Energy sold to other countries
Imports (M) – these are goods and services bought from other countries
When we import, money flows out of the country (otherwise known as a leakage).
Examples:
– Oil bought from overseas
– Food imported from another country
– Electronics purchased from abroad
Formula
Trade Balance = Value of Exports – Value of Imports = X – M
Trade Surplus
When the X > M, we call it a trade surplus. This means that the country sells more abroad than it buys
Example:
X = 600b
M = 200b
600b – 200b = 400b
Trade surplus: 400b
Trade Deficit
When the X < M, we call it a trade deficit. This means that the buys more than it sells to countries abroad
Example:
X = 1000b
M = 500b
500b – 1000b = -500b
Trade deficit: -500