Balance of Trade

Balance of Trade

The balance of trade is difference between the value of exports and imports of a country.

ie: A country which imports more goods and services than exports will have deficit of balance of trade.

Why balance of trade is talked about?

When the imports surge without increase in the exports, then it usually is discussed. There is a feeling that it should be balanced and balance of trade should be reduced. 

The govt identifies areas of higher growth, create policies which will drive exports, create right incentives to stimulate that growth.

The balance of trade can be classified as 1) of goods and 2) of services.

View of economists of Balance of trade

Several economists have opined that a growing country will have increase in the deficit. Hence, there is no need to focus on the trade deficit alone.

If the imports are used productively, then the exports will also rise and there will be employment

*Eg:

Company A imported 5 machines at 100 cr which would increase exports of the firm by 5 cr a year. And the machines work for average 30 years with minimal repairs. The machines are employing 3000 employees.

Company B bought imported TVs for all its workers worth 10 Cr and all are seeing TV. The TV decreased the working hours, decreased output of the workers. The exports of country fell by 1 cr in the year.

Imagine that there are 100 A type companies and very 5 B type companies. If the imports are tilted to expenditures more of Company A type functions (the function could be performed by govt, private etc), then employment, exports etc will be improved and nation will prosper. The trade deficit might be more when there are many A type companies but similarly the employment and productivity would be higher. There will be around 3 lakh jobs generated and exports increase per year of 500 cr. 

Imagine, another scenario where there are 100 B type companies and 5 A type companies. The deficit might be lower, but the jobs created and exports generated are lower. 

*Above is a gross simplistic example to focus on the productive use of funds raised.

Hence, I am avoiding the usual coaching centre material which usually classifies balance of trade into favourable, balanced and unfavourable.