# Balance of Trade (BOT): Definition, Calculation, and Examples

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

Balance of trade (BOT) is the difference between the value of a country's exports and the value of a country's imports for a given period. Balance of trade is the largest component of a country's balance of payments (BOP). Sometimes the balance of trade between a country's goods and the balance of trade between its services are distinguished as two separate figures.

The balance of trade is also referred to as the trade balance, the international trade balance, the commercial balance, or the net exports.

### Key Takeaways

• Balance of trade (BOT) is the difference between the value of a country's imports and exports for a given period and is the largest component of a country's balance of payments (BOP).
• A country that imports more goods and services than it exports in terms of value has a trade deficit while a country that exports more goods and services than it imports has a trade surplus.
• Viewed alone, a favorable balance of trade is not sufficient to gauge the health of an economy. It is important to consider the balance of trade with respect to other economic indicators, business cycles, and other indicators.
• The United States regularly runs a trade deficit, while China usually runs a large trade surplus.
1:35

## Understanding the Balance of Trade (BOT)

The formula for calculating the BOT can be simplified as the total value of exports minus the total value of its imports. Economists use the BOT to measure the relative strength of a country's economy.

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 balance of trade indicates that a country's producers have an active foreign market. After producing enough goods to satisfy local demand, there is enough demand from customers abroad to keep local producers busy. A negative balance of trade means that currency flows outwards to pay for exports, indicating that the country may be overly reliant on foreign goods.

## Calculating 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 sold to foreign countries, as well as other outflows due to remittances, foreign aid, donations or loan repayments. Imports represents the dollar value of all foreign goods imported from abroad, as well as incoming remittances, donations, and aid.

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, a quarter, or a year.

### Example of How to Calculate the BOT

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

Let's say that a country's exports of goods in a given year are worth $100 million, and its imports of goods 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

## Balance of Trade: Favorable vs. Unfavorable

A favorable 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. 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, an unfavorable 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. A trade deficit can be the result of a country having a comparative disadvantage in the production of certain goods, or it can be the result of a country's currency being relatively overvalued, making its imports cheaper and its exports more expensive.

In general, a favorable balance of trade is seen as a positive sign for a country's economy, while an unfavorable balance of trade is seen as a negative sign. However, it's important to note that a trade deficit or surplus is not always a sign of economic strength or weakness, and other factors such as a country's overall economic growth, employment rate, and inflation rate should also be taken into account.

## Special Considerations

A country with a large trade deficit borrows money to pay for its goods and services, while a country with a large trade surplus lends money to deficit countries. In some cases, the trade balance may correlate to a country's political and economic stability because it reflects the amount of foreign investment in that country.

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 and other economic indicators. For example, in a recession, countries prefer to export more to create jobs and demand in the economy. In times of economic expansion, countries prefer to import more to promote price competition, which limits inflation.

## Balance of Trade vs. Balance of Payments

The balance of trade is the difference between a country's exports and imports of goods, while the balance of payments is a record of all international economic transactions made by a country's residents, including trade in goods and services, 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.

It's important to note that the balance of trade and the balance of payments are not the same thing, although they are related. The balance of trade measures the flow of goods into and out of a country, while the balance of payments measures all international economic transactions, including trade in goods and services, financial capital, and financial transfers.

A country can have a positive balance of trade (a trade surplus) and a negative balance of payments (a deficit) if it is exporting more goods than it is importing, but it is also losing financial capital or making financial transfers. Conversely, a country can have a negative balance of trade (a trade deficit) and a positive balance of payments (a surplus) if it is importing more goods than it is exporting, but it is also receiving a large amount of financial capital or making financial transfers.

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

When the price of one country's currency increases, 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 Favorable Balance of Trade?

A favorable balance of trade occurs when a country's exports exceed the value of its imports. This indicates a positive inflow of money to stimulate local economic activity.

## How Can a Country Gain a Favorable Balance of Trade?

Many seek to improve their balance of trade by investing heavily in export-oriented manufacturing or extracting industries. It is also possible to improve the balance of trade by placing tariffs on imported goods, or by devaluing the country's currency.

## 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 (favorable balance of trade), and if the result is negative, it means that the country has a trade deficit (unfavorable balance of trade).

## The Bottom Line

The balance of trade is the difference between a country's exports and imports of goods. A 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. On the other hand, a 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. The balance of trade is an important component of a country's balance of payments, which is a record of all its international economic transactions.

Correction—Feb. 8, 2023: A previous version of this article wrongly defined positive balance of trade and negative balance of payments, and vice versa.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
1. Economic Research Federal Reserve Bank of St. Louis. "Historical U.S. Trade Deficits."