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What is 'Balance Of Trade - BOT'?

The balance of trade (BOT) is the difference between the value of a country's imports and its exports for a given period. The balance of trade is the largest component of a country's balance of payments (BOP). Economists use the BOT as a measure of the relative strength of a country's economy. 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 in terms of value has a trade deficit. Conversely, a country that exports more goods and services than it imports has a trade surplus. The formula for calculating the BOT can be simplified as the total value of imports minus the total value of exports. However, the actual calculation includes several elements, and the amount of the trade deficit or surplus is compared to the country's gross domestic product (GDP).

Calculating 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 because of its dependency on oil imports 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 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.

In 2017, Germany, Japan, China and South Korea had the largest trade surpluses by current account balance. The United States, the United Kingdom, Canada, and Turkey had the largest trade deficits.

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