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. The formula for calculating the BOT can be simplified as the total value of imports minus the total value of exports. For any economy current asset, BOT is one of the significant components as it measures a country’s net income earned on global assets. Value of Exports is the value of goods and services that are sold to buyers in other countries. The country has a positive balance of trade, which means that the value of its exports is worth more than the value of its imports, it is said to be running a trade surplus. Consider a simple example which 2 countries, Country A and Country B, who both only produce one good. Investopedia uses cookies to provide you with a great user experience. The offers that appear in this table are from partnerships from which Investopedia receives compensation.

A country that imports more goods and services than it exports in terms of value has a trade deficit.

Suppose the price of wine is $2 and the price of cheese is $1.

For example, the United States has had a trade deficit since 1976 because of its dependency on oil imports and consumer products. In general, the trade balance is an easy way to measure as all goods and services must pass through the customs office and are thus recorded. Suppose that Canada wishes to purchase a car from the USA and that is the only trade which occurs between these two countries, which means that the USA has the trade surplus.

Notify me of follow-up comments by email. There are some countries that are so opposed to trading deficits that they adopt mercantilism to control it and this is considered as an extreme form of economic nationalism that works to remove the trade deficit in every situation. Conversely, if the balance of trade is negative (the value of exports are less than the value of imports) than the country is said to be running a trade deficit. However, there are instances, when a surplus or favorable trade balance is not in the country’s best interests. For the balance of trade examples in times of economic growth, countries prefer to import more to promote price competition, which limits inflation whereas, in a recession, countries prefer to export more to create jobs and demand in the economy. Therefore Country A is running a trade surplus since the value of exports exceeds the value of imports. The balance of payments (BOP) is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time, such as a quarter or a year.

← Consumer part of dead weight loss, Producer part of dead weight loss and total dead weight loss.

When exports are less than imports, it is known as the trade deficit. But it is perceived as positive because many of its imports are raw materials which convert into finished goods and finally exports. 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.

We can now calculate the balance of trade for Country B: \text{B.O.T for Country A}=$1 *3-$2*5=-$7. They consider a surplus as a favorable trade balance because it’s considered as making a profit for a country.

In times of economic expansion, countries prefer to import more to promote price competition, which limits inflation. Remember, you can see whether you have calculated it correctly by adding the two countries balance of trade together. Suppose that Country A exports 5 units of wine and imports 3 units of cheese. Bureau of Economic Analysis. 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).

Nations prefer to sell more products when compared to buy products which in turn receive more capital for their residents which translates into a higher standard of living. In general, the trade balance is an easy way to measure as all goods and services must pass through the customs office and are thus recorded. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy, Halloween Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More, All in One Financial Analyst Bundle (250+ Courses, 40+ Projects), 250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion.


The balance of trade (BOT) is defined as the country’s exports minus its imports. A trade surplus or deficit is not always a final indicator of an economy’s health and must be considered along with the business cycle and other economic indicators.
Most countries work to create policies that encourage a trade surplus in the long term. In addition, we discuss a trade surplus and trade deficit. For example, the United States imported $239 billion in goods and services in Aug. 2020, but exported only $171.9 billion in goods and services to other countries, then the United States had a trade balance of -$67.1 billion, or a $67.1 billion trade deficit., $239 trillion in imports - $171.9 trillion in exports = $67.1 billion trade deficit.

In 2019, Germany had the largest trade surplus by current account balance with Japan and China coming in second and third. The balance of trade in this scenario would be defined as: \text{B.O.T} = \text{Price of exports} * \text{Quantity of exports} - \text{Price of imports} * \text{Quantity of imports}, \text{value of exports} = \text{Price of exports}*\text{Quantity of exports}, \text{value of imports} = \text{Price of imports}*\text{Quantity of imports}. In effect, an economy with a trade surplus lends money to deficit countries whereas an economy with a large trade deficit borrows money to pay for its goods and services.

This gives it a competitive advantage in manufacturing and finance and creates a higher standard of living for its people. If done right, they should sum to 0. Sometimes a distinction is made between a balance of trade for goods versus one for services.

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