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BALANCE OF TRADE

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Abhijeet S
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BALANCE OF TRADE - September 13th, 2010

BALANCE OF TRADE
Balance of trade may be defined as the difference between the value of goods and services sold to foreigners by the residents and firms of the home country and the value of goods and services purchased by them from foreigners. In other words, the difference between the value of goods and services exported and imported by a country is the measure of balance of trade.


If two sums (1) value of exports of goods and services and (2) value of imports of goods and services are exactly equal to each other, we say that there is balance of trade equilibrium or balance; if the former exceeds the latter, we say that there is a balance of trade surplus; and if the later exceeds the former, then we describe the situation as one of balance of trade deficit. Surplus is regarded as favourable while deficit is regarded as unfavorable.


The above mentioned definition has been given by James. E. Meade – a Nobel Prize British Economist. However, some economists define balance of trade as a difference between the value of merchandise (goods) exports and the value of merchandise imports, making it the same as the ‘Goods Balance” or the “Balance of Merchandise Trade”.


There is n doubt that the balance of merchandise trade is of great significance to exporting countries, but still the BOT as defined by J. E. Meade has greater significance.


Regardless of which idea is adopted, one thing is certain i.e. that balance of trade is a national injection and hence it is appropriate to regard an active balance (an excess of credits over debits) as a desirable state of affairs. Should this then be taken to imply that a passive trade balance (an excess of debits over credits) is necessarily a sign of undesirable state of affairs in a country? The answer is “no”.


Because, take for example, the case of a developing country, which might be importing vast quantities of capital goods and technology to build a strong agricultural or industrial base.

Such a country in the course of doing that might be forced to experience passive or adverse balance of trade and such a situation of passive balance of trade cannot be described as one of undesirable state of affairs.


This would therefore again suggest that before drawing meaningful inferences as to whether passive trade balances of a country are desirable or undesirable, we must also know the composition of imports which are causing the conditions of adverse trade balance.
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