What is 'Balance Of Trade - BOT'
The balance of trade (BOT) is the difference between a country's imports and its exports for a given time period. The balance of trade is the largest component of the country's balance of payments (BOP). Economists use the BOT as a statistical tool to help them understand the relative strength of a country's economy versus other countries' economies and the flow of trade between nations. The balance of trade is also referred to as the trade balance or the international trade balance.
BREAKING DOWN 'Balance Of Trade - BOT'A country that imports more goods and services than it exports has a trade deficit. Conversely, a country exports more goods and services than it imports has a trade surplus. The formula for calculating the BOT can be simplified to imports minus exports. However, the actual calculation is comprised of several elements.
To make complete sense, the raw number of the trade deficit or surplus must be compared to the country's gross domestic product (GDP), since larger economies may be better suited to handle large deficits and surpluses.
Detailed Formula for the Calculation of a Country's BOT
Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy. By subtracting the credit items from the debit items, economists arrive at a trade deficit or trade surplus for a given country over the period of a month, quarter or year.
Examples of Balance of Trade
There are countries where it is almost certain that a trade deficit will occur. For example, the United States has had a trade deficit since 1976, in large part due to its imports of oil and consumer products. Conversely, China, a country that produces and exports many of the world's consumable goods, has recorded a trade surplus since 1995.
A trade surplus or deficit, taken on its own, is not necessarily a viable indicator of an economy's health. The numbers must be taken in context relative to the business cycle and other economic indicators. For example, in a recession, countries like to export more, creating jobs and demand in the economy. In a strong expansion, countries prefer to import more, providing price competition, which limits inflation.
In 2015, the European Union, Germany, China and Japan all had very large trade surpluses, while the United States, the United Kingdom, Brazil, Australia and Canada had the largest trade deficits.