Trade Balance measures the difference in value between imported and exported goods and services.
It is the largest component of a country’s balance of payments (BOP).
The trade balance or “balance of trade” measures the difference between the value of goods and services that a nation exports and the value of goods and services than it imports.
If exports are higher than imports (a trade surplus), the trade balance will be positive. If imports are higher than exports (a trade deficit), the trade balance will be negative.
Nations with trade surpluses (exports greater than imports), such as Japan, tend to see their currencies appreciate, while countries with trade deficits (imports greater than exports), such as the US, tend to see their currencies weaken.
The trade balance is derived primarily from three factors:
- The price of goods in a country
- Tax and tariff levies on imported or exported goods
- The exchange rate between two currencies
Information on the net exports in a country can help to predict future trends in inflation and foreign investment.