# Understanding the Balance of Trade: Definition, Calculation, and Examples

## What Is the Balance of Trade (BOT)?

The balance of trade (BOT) represents the difference between a country's export and import values over a specific timeframe, forming the backbone of the broader [balance of payments](https://www.investopedia.com/terms/b/bop.asp) (BOP). Often depicted as the trade balance or net exports, BOT offers insight into a nation's economic interactions with the world.

By distinguishing the trade in goods from services, BOT paints a nuanced picture of international trade dynamics. While a positive trade balance, or surplus, highlights strong overseas demand for a nation's goods, a negative balance, known as a deficit, indicates higher import expenditure compared to export revenue. Understanding the BOT can shed light on a country's economic health and its standing in global markets.

### Key Takeaways

*   The balance of trade measures the difference between a country's exports and imports, and is a key component of the country's balance of payments.
*   A trade surplus occurs when exports exceed imports, leading to a positive balance, while a trade deficit happens when imports surpass exports, resulting in a negative balance.
*   The balance of trade is calculated by subtracting the value of imports from the value of exports.
*   The balance of trade alone does not indicate economic health; the reasons behind a deficit or surplus must be examined for a comprehensive economic assessment.

![Balance of Trade](https://www.investopedia.com/thmb/h9TQfGcvyDDLdVzkYhRsD-muu2U=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/BOT-V2-resized-6c19a9acbef14c299fe4740d9a715b88.jpg)

*— Investopedia / Matthew Collins*

## How the Balance of Trade (BOT) Works  

The formula for calculating the BOT can be simplified as the total value of exports minus the total value of its imports. BOT alone isn't an economic health indicator, and a negative trade balance isn't always bad. In order to use the trade balance as part of an economic health assessment, context is needed. One must look at why the balance is positive or negative.

A country that imports more goods and services than it exports in terms of value has a trade deficit or a negative trade balance. Conversely, a country that exports more goods and services than it imports has a trade surplus or a positive trade balance.

A positive trade balance shows that a country's producers have a strong foreign market. Once local demand is met, foreign customer demand keeps producers busy. A negative trade balance signals currency outflow for exports, suggesting reliance on foreign goods. However, that is not always the case. It could also mean the country is wealthy and has a high level of demand that needs to be satisfied.

## How to Calculate the Balance of Trade

A country's balance of trade is calculated by the following formula:

$\begin{aligned}&\textbf{BOT}=\textbf{Exports}-\textbf{Imports}\end{aligned}$

Where exports represents the currency value of all goods and services exported to foreign countries, and imports represents the currency value of all goods and services imported from foreign countries.

### Balance of Trade Calculation Example

Here's an example of how to calculate the balance of trade:

Let's say that a country's export in a given year are worth $100 million, and its imports are worth $80 million. To calculate the balance of trade, you would subtract the value of the imports from the value of the exports:

Balance of trade = Exports - Imports  
\= $100 million - $80 million  
\= $20 million

In this example, the balance of trade is +$20 million, which means that the country has a trade surplus of $20 million.

It's important to note that the balance of trade is typically measured in the currency of the country whose trade balance is being calculated.  If the country is the United States, the trade balance is measured in [US dollars](https://www.investopedia.com/ask/answers/061515/what-happens-us-dollar-during-trade-deficit.asp). If the country is Japan, it would be measured in Japanese yen, and so on.  

### Real-World Examples of Trade Surplus and Deficit  

The United States imported $324.6  billion in goods and services in January 2024, and exported $257.2 billion in goods and services to other countries. In January 2024, the United States had a trade balance of -$67.4 billion, or a $67.4 billion [trade deficit](https://www.investopedia.com/terms/t/trade_deficit.asp).

A trade deficit is not a recent occurrence in the United States. In fact, the country has had a persistent trade deficit since the 1970s. Throughout most of the 19th century, the country also had a trade deficit (between 1800 and 1870, the United States ran a trade deficit for all but three years).

For its January-February 2024 period, China reported a trade surplus of $125.16 billion. This was significantly higher than forecasted amounts, and much greater than the December 2023 trade surplus of $75.3 billion.  

## Trade Surplus vs. Trade Deficit: What They Mean

A numerically positive balance of trade, also known as a trade surplus, occurs when a country's exports are worth more than its imports. This is measured in their total value using the country's currency. A trade surplus can be a result of a country having a competitive advantage in the production and export of certain goods, or it can be the result of a country's currency being relatively undervalued, making its exports cheaper for foreign buyers.

On the other hand, a numerically negative balance of trade, also known as a trade deficit, occurs when a country imports more goods and services than it exports in terms of their total value in the country's currency. This means that the country is spending more on imports than it is earning from exports. While it may be a cause for concern in some instances, often it's not a problem. It is also not an indication of economic crisis, or weakness.  A trade deficit can result from a comparative production disadvantage or an overvalued currency that makes imports cheaper and exports pricier.

In general, a trade surplus is seen as a positive sign for a country's economy, while a trade deficit is often seen as a negative sign. However, that's not always true. A trade surplus or trade deficit is not inherently good nor bad. The balance of trade alone is not an indicator of economic health. The context of the balance of trade is very important. It's necessary to look at why a trade deficit or surplus is occurring. For example, if imports fall faster than exports due to a recession killing demand that would be a situation in which a surplus can occur during a time of economic difficulty. On the other hand exports could boom due to an increase in demand from a key trading partner, an example of a trade surplus in positive times. To access an economy's overall strength or weakness, it's also necessary to look beyond the balance of trade at things such as inflation, unemployment, growth, production, and more.

## Important Factors Influencing Trade Balances

A country with a large trade deficit borrows to cover goods and services, while a [surplus](https://www.investopedia.com/terms/t/trade-surplus.asp) country lends to others. A country may only be able to borrow a lot to run that deficit if it is deemed dependable and creditworthy. The United States is a prime example. On the other hand, the less creditworthy a country, the higher its borrowing costs will be, and therefore its deficit will be more damaging.

A trade surplus or deficit is not always a viable indicator of an economy's health, and it must be considered in the context of the [business cycle](https://www.investopedia.com/terms/b/businesscycle.asp) and other economic indicators. During a [recession](https://www.investopedia.com/terms/r/recession.asp), countries aim to export more to create jobs and boost economic demand. In times of economic [expansion](https://www.investopedia.com/terms/e/expansion.asp), countries have a great appetite for imports and may use them to increase price competition, which limits inflation.

## Comparing Trade Balance and Balance of Payments

The balance of trade is the difference between a country's exports and imports of goods and services, while the balance of payments is a record of all international economic transactions made by a country's residents, including trade as well as financial capital and financial transfers. The balance of trade is a part of the balance of payments and is represented in the current account, which also includes income from investments and transfers such as foreign aid and gifts. The capital account, which is another part of the balance of payments, includes financial capital and financial transfers.

Note that the balance of trade and balance of payments are related but not the same. The balance of trade measures goods and services flow, while the balance of payments tracks all international transactions.

A country can have a trade surplus and a payments deficit if it's exporting more but losing financial capital or making transfers. A country can have a trade deficit and a payments surplus if it imports more but receives substantial financial capital or transfers.  

## How Do Changes in a Country's Exchange Rate Affect the Balance of Trade?

When the [price of one country's currency increases](https://www.investopedia.com/ask/answers/041515/how-does-balance-trade-impact-currency-exchange-rates.asp#), the cost of its goods and services also increases in the foreign market. For residents of that country, it will become cheaper to import goods, but domestic producers might have trouble selling their goods abroad because of the higher prices. Ultimately, this may result in lower exports and higher imports, causing a trade deficit.

## What Is a Trade Surplus?

A trade surplus occurs when the value of a country's exports exceeds the value of its imports. This indicates a positive inflow of money, shown by the balance of trade being a positive number.

## How Can a Country Gain a Trade Surplus?

Countries can shift from a trade deficit to a surplus by investing heavily in export-oriented manufacturing or extracting industries. It is also possible to move toward a trade surplus by placing tariffs on imported goods, or by devaluing the country's currency. However, each of these actions can have negative consequences for an economy. There are always trade-offs. For example, tariffs often lead to inflation and higher consumer prices. Devaluing a currency is obviously inflationary as well and wipes out people's savings. A trade deficit on its own is not necessarily a problem and doesn't need fixing for the sake of fixing.

## How Do We Measure Balance of Trade?

The balance of trade is typically measured as the difference between a country's exports and imports of goods. To calculate the balance of trade, you would subtract the value of a country's imports from the value of its exports. If the result is positive, it means that the country has a trade surplus, and if the result is negative, it means that the country has a trade deficit.

## The Bottom Line

The balance of trade is the difference between a country's exports and imports of goods. A numerically positive balance of trade, also known as a trade surplus, occurs when a country exports more goods than it imports. This means that the country is earning more from its exports than it is spending on its imports, and it is generally seen as a sign of economic strength. Although, it's not an indicator of economic health on its own.

On the other hand, a numerically negative balance of trade, also known as a trade deficit, occurs when a country imports more goods than it exports. This means that the country is spending more on imports than it is earning from exports, and it can be a cause for concern if it persists over a long period of time. However, it's not always a problem, and many successful economies have run trade deficits for decades. The balance of trade is an important component of a country's balance of payments, which is a record of all its international financial transactions.

**_Correction—Feb. 8, 2023:_** A previous version of this article incorrectly defined a positive balance of trade and a negative balance of payments. It has been edited to reflect that a positive balance of trade and negative balance of payments occurs when a country is exporting more goods than it is importing.

> **Article Sources**
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> 1.  United States Bureau of Economic Analysis. "[January 2024 Trade Gap Is $67.4 Billion](https://www.bea.gov/news/blog/2024-03-07/january-2024-trade-gap-674-billion)."
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> 2.  Federal Reserve Bank of St. Louis. "[Historical U.S. Trade Deficits](https://files.stlouisfed.org/research/publications/economic-synopses/2019/05/17/historical-u-s-trade-deficits.pdf)."
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> 3.  Nikkei Asia. "[China’s Exports Beat Forecasts, Rise 7.1% in January-February](https://asia.nikkei.com/Economy/Trade/China-s-exports-beat-forecasts-rise-7.1-in-January-February)."