The balance of trade encompasses the activity of exports and imports, like the work of this cargo ship going through the Panama Canal.

The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary value of exports and imports in an economy over a certain period of time. A positive balance of trade is known as a trade surplus and consists of exporting more than is imported; a negative balance of trade is known as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance; especially in the United Kingdom the terms visible and invisible balance are used. ImageMetadata File history File links Download high resolution version (1024x640, 87 KB) Summary A ship moves between lock chambers of the Panama Canal. ... ImageMetadata File history File links Download high resolution version (1024x640, 87 KB) Summary A ship moves between lock chambers of the Panama Canal. ... The Panama Canal is a waterway in Central America which joins the Pacific and Atlantic oceans. ... This article is being considered for deletion in accordance with Wikipedias deletion policy. ... The invisible balance is that part of the balance of trade figures that refers to services and commercial money transfer that does not result in the transfer of physical objects. ...

Definition

The balance of trade forms part of the current account, which also includes other transactions such as income from the international investment position as well as international aid. If the current account is in surplus, the country's net international asset position increases correspondingly. Equally, a deficit decreases the net international asset position. Blue = countries in current account surplus; Red = countries in current account deficit, 2005 The current account of the balance of payments is the sum of the balance of trade (exports less imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as... A countrys international investment position is the result of its financial account in the balance of payments. ... Blue = countries in current account surplus; Red = countries in current account deficit, 2005 The current account of the balance of payments is the sum of the balance of trade (exports less imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as...

The trade balance is identical to the difference between a country's output and its domestic demand (the difference between what goods a country produces and how many goods it buys from abroad; this does not include money re-spent on foreign stocks, nor does it factor the concept of importing goods to produce for the domestic market).

Measuring the balance of payments can be problematic because of problems with recording and collecting data. As an illustration of this problem, when official data for all the world's countries are added up, exports exceed imports by a few percent; it appears the world is running a positive balance of trade with itself. This cannot be true, because all transactions involve an equal credit or debit in the account of each nation. The discrepancy is widely believed to be explained by transactions intended to launder money or evade taxes, smuggling and other visibility problems. However, especially for developed countries, accuracy is likely to be good. Credit as a financial term, used in such terms as credit card, refers to the granting of a loan and the creation of debt. ... link title Debit is an accounting and bookkeeping term that comes from the Latin word debere which means to owe. ...

Factors that can affect the balance of trade figures include:

• Prices of goods manufactured at home (influenced by the responsiveness of supply)
• Exchange rates
• Trade agreements or barriers
• Other tax, tariff and trade measures
• Business cycle at home or abroad.

The balance of trade is likely to differ across the business cycle. In export led growth (such as oil and early industrial goods), the balance of trade will improve during an economic expansion. However, with domestic demand led growth (as in the United States and Australia) the trade balance will worsen at the same stage in the business cycle. Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        A trade pact is a wide ranging tax, tariff and trade... The tax, tariff and trade laws of a political region, state or trade bloc determine which forms of consumption and production tend to be encouraged or discouraged. ...

Strong GDP growth economies such as the United States, the United Kingdom, Australia and Hong Kong run consistent trade deficits, as well as poorer countries also experiencing a lot of investment.

Developed nations such as Canada, Japan, and Germany typically run trade surpluses. China also has a trade surplus. A higher savings rate generally corresponds with a trade surplus. Correspondingly, the United States with its negative savings rate consistently has high trade deficits.

Economic impact

Modern economists are split on the economic impact of the trade deficit with some viewing it as a loss in a fixed volume of trade and other voices who claim it is a sign of economic strength.

Against

Historically, Rome's economy weakened as it became reliant on imports while its exports languished.

Some economists believe that GDP and employment^[1][2] can be dragged down by an over-large deficit. Those who ignore the effects of trade deficits may be confusing the David Ricardo's principle of comparative advantage with Adam Smith's principle of absolute advantage, specifically ignoring that latter. The economist Paul Craig Roberts notes that the comparative advantage principles developed by David Ricardo do not hold where the factors of production are internationally mobile.^{[3] [4]} Free trade concepts presume free floating currencies; however, in the real world, currencies such as China's are not free floating, while others may be manipulated by governments. In economics, David Ricardo is credited for the principle of comparative advantage to explain how it can be beneficial for two parties (countries, regions, individuals and so on) to trade if one has a lower relative cost of producing some good. ... A country has an absolute advantage economically over another, in a particular good, when it can produce that good more efficiently. ... Paul Craig Roberts Paul Craig Roberts is an economist and a nationally syndicated columnist for Creators Syndicate. ... In economics, David Ricardo is credited for the principle of comparative advantage to explain how it can be beneficial for two parties (countries, regions, individuals and so on) to trade if one has a lower relative cost of producing some good. ... David Ricardo (18 April 1772–11 September 1823), a political economist, is often credited with systematizing economics, and was one of the most influential of the classical economists, along with Thomas Malthus and Adam Smith. ...

Since the stagflation of the 1970s, the U.S. economy has been characterized by slower growth. In 1985, the U.S. began its growing trade deficit with China. In 2006, the primary economic concerns have centered around: high national debt ($9 trillion), high corporate debt ($9 trillion), high mortgage debt ($9 trillion), high unfunded Medicare liability ($30 trillion), high unfunded Social Security liability ($12 trillion), high external debt (amount owed to foreign lenders) and a serious deterioration in the United States net international investment position (NIIP) (-24% of GDP),^[5] high trade deficits, and a rise in illegal immigration. These issues have raised concerns among economists and unfunded liabilities were mentioned as a serious problem facing the United States in the President's 2006 State of the Union address.^[6] Stagflation, a portmanteau of the words stagnation and inflation, is a term in general use within modern macroeconomics used to describe a period of out-of-control price inflation combined with slow-to-no output growth, rising unemployment, and eventually recession. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        Government debt (also known as public debt or national debt) is... A countrys international investment position (IIP) is a financial statement setting out the value and composition of that countrys external financial assets and liabilities. ... Balance of trade figures are the sum of the money gained by a given economy by selling exports, minus the cost of buying imports. ... Illegal alien and Illegal aliens redirect here. ... Economists are scholars conducting research in the field of economics. ... George W. Bush listening to applause whilst delivering the 2006 State of the Union address Wikinews has news related to this article: President Bush delivers 2006 State of the Union Address Wikisource has source texts related to this article: George W. Bushs Sixth State of the Union Address Democratic...

Pro

Those who defend deficits revert to explanations of comparative advantage. Buyers in the receiving country send the money back. A firm in America sends dollars for Brazilian sugarcane, and the Brazilian receivers use the money to buy stock in an American company. This may lead to profits leaving the U.S however as Americans may forfeit control. Although this is a form of capital account reinvestment, it may not be a liability on anyone in America.

Such payments to foreigners have intergenerational effects: by shifting the consumption schedule over time, some generations may gain and others lose ^[7]. However, a trade deficit may incur consumption in the future if it is financed by profitable domestic investment, in excess of that paid on the net foreign debts. Similarly, an excess on the current account shifts consumption to future generations, unless it raises the value of the currency, detering foriegn investment. Invest redirects here. ... Blue = countries in current account surplus; Red = countries in current account deficit, 2005 The current account of the balance of payments is the sum of the balance of trade (exports less imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as...

However, trade inequalities are not natural given differences in productivity and consumption preferences. Trade deficits have often been associated with international competitiveness. Trade surpluses have been associated with policies that skew a country's activity towards externalities, resulting in lower standards. An example of an economy which has had a positive balance of payments was Japan in the 1990s.

Milton Friedman argued that trade deficits are not important, as he thought high exports would raise the value of the currency, reducing aforementioned exports, and visa versa for imports, thus naturally removing trade deficits not due to investment. This opinion is shared by David Friedman, who has said that they are 'fossil economics', based on ideas obsolete since David Ricardo. ^[8] David Friedman David D. Friedman (born 1945), is a libertarian writer who became a leading figure in Anarcho-capitalism with the publication of his book The Machinery of Freedom (1971). ... David Ricardo (18 April 1772–11 September 1823), a political economist, is often credited with systematizing economics, and was one of the most influential of the classical economists, along with Thomas Malthus and Adam Smith. ...

Milton Friedman on trade deficits

US exports in 2006

Milton Friedman, the Nobel Prize-winning economist and father of Monetarism, argued that many of the fears of trade deficits are unfair criticisms in an attempt to push macroeconomic policies favorable to exporting^[9] industries. He stated his belief that these deficits are not harmful to the country as the currency always comes back to the country of origin in some form or another (country A sells to country B, country B sells to country C who buys from country A, but the trade deficit only includes A and B). In fact, in his view, the "worst case scenario" of the currency never returning to the country of origin was actually the best possible outcome: the country actually purchased its goods by exchanging them for pieces of cheaply-made paper. As Friedman put it, this would be the same result as if the exporting country burned the dollars it earned, never returning it to market circulation. Image File history File links Size of this preview: 800 × 351 pixelsFull resolution (1425 × 625 pixel, file size: 60 KB, MIME type: image/png)This bubble map shows the global distribution of US exports (f. ... Image File history File links Size of this preview: 800 × 351 pixelsFull resolution (1425 × 625 pixel, file size: 60 KB, MIME type: image/png)This bubble map shows the global distribution of US exports (f. ... Milton Friedman (July 31, 1912 – November 16, 2006) was an American Nobel Laureate economist and public intellectual. ... The Nobel Prize (Swedish: ) was established in Alfred Nobels will in 1895, and it was first awarded in Physics, Chemistry, Physiology or Medicine, Literature, and Peace in 1901. ... Monetarism is a set of views concerning the determination of national income and monetary economics. ...

However, Friedman's argument may have been a short term argument that has not proven valid in the long run. It is equivalent to saying that it doesn't matter if you get indebted, because eventually you will have to pay the money back. The obvious counterargument is that once a significant debt has been accumulated, paying it back may be painful. Friedman's supporters retort that when the money returns, the demand for foreign currency will make the exchange rate better for trade deficit country.

Those who assert Friedman's view as if it were a long run view may be ignoring the intergenerational or long run consequences of deficits, low savings, and borrowing to fund consumption. If country A has a trade deficit because of large imports of consumer goods, other countries accumulate cash from country A. That money can be used to purchase existing investment assets and government bonds within country A. As a result, the return from those assets will accrue not to citizens of country A but to foreigners. The consumption standard of future generations in country A may therefore potentially decline as a result of the deficit. In particular, Americans are increasingly paying taxes to finance the interest on federal bonds held by foreigners. However, a criticism of this argument notes that all transactions are win-win. In the case of foreign investment in American assets, it helps fuel American economic growth and keeps US interest rates low. This argument is more appealing in the case of foreign direct investment, and less obvious when foreigners simply purchase the existing stock of assets. It has been suggested that Win-win strategy be merged into this article or section. ...

Friedman also believed that deficits would be corrected by free markets as floating currency rates rise or fall with time to encourage or discourage imports in favor of the exports, reversing again in favor of imports as the currency gains strength. A potential difficulty however is that currency markets in the real world are far from completely free, with government and central banks being major players, and this is unlikely to change within the foreseeable future. Nevertheless, recent developments have shown that the global economy is undergoing a fundamental shift. For many years the U.S. has borrowed and bought while in general, the rest of the world has lent and sold. However, as Friedman predicted, this paradigm appears to be changing.

As of October 2007, the U.S. dollar has grown weaker against the euro, British pound, and many other currencies. For instance, the euro hit $1.42 in October 2007^[10], the strongest it has been since its birth in 1999. Against this backdrop, American exporters are finding quite favorable overseas markets for their products and U.S. consumers are responding to their general housing slowdown by slowing their spending. Furthermore, China, the Middle East, central Europe and Africa are absorbing more of the world's imports which in the end may result in a world economy that is more evenly balanced. All of this could well add up to a major readjustment of the U.S. trade deficit, which as a percentage of GDP, began in 1991.^[11]

Friedman and other economists have also pointed out that a large trade deficit (importation of goods) signals that the country's currency is strong and desirable. To Friedman, a trade deficit simply meant that consumers had opportunity to purchase and enjoy more goods at lower prices; conversely, a trade surplus implied that a country was exporting goods its own citizens did not get to consume or enjoy, while paying high prices for the goods they actually received.

Perhaps most significantly, Friedman contended strongly that the current structure of the balance of payments is misleading. In an interview with Charlie Rose, he stated that "on the books" the US is a net borrower of funds, using those funds to pay for goods and services. He pointed to the income receipts and payments showing that the US pays almost the same amount as it receives: thus, U.S. citizens are paying lower prices than foreigners for capital assets to exchange roughly the same amount of income. The reasons why the U.S. (and UK) appear to earn a higher rate of return on their foreign assets than they pay on their foreign liabilities are not clearly understood. An important contributing factor is that the U.S. has investment primarily in stocks abroad, while foreigners have invested heavily in debt instruments, such as U.S. government bonds ^[12]. ^[13] Other reports contend that U.S. net foreign income has deteriorated, and appears set to stay in deficit in the future ^[14].

Friedman presented his analysis of the balance of trade in Free to Choose, widely considered his most significant popular work. Free to Choose is both a book (ISBN 0156334607) and a ten-part television series. ...

Physical balance of trade

Monetary balance of trade is different from physical balance of trade (which is expressed in amount of raw materials). Developed countries usually import a lot of primary raw materials from developing countries at low prices. Often, these materials are then converted into finished products, and a significant amount of value is added. Although for instance the EU (as well as many other developed countries) has a balanced monetary balance of trade, its physical trade balance (especially with developing countries) is negative, meaning that in terms of materials a lot more is imported than exported.

United States trade deficit

The United States has posted a trade deficit since the 1970s, and it has been rapidly increasing since 1997 ^[15] (see chart below). The US trade deficit hit a record high of 763.6 billion dollars in 2006, up from 716.7 billion dollars in 2005.^[16]

It is worth noting on the graph that the deficit slackened during recessions and grew during periods of expansion. Also of note, many economists calculate trade deficits and/or current account deficits as a percentage of GDP. The U.S. last had a trade surplus in 1991, a recession year. Every year there has been a major reduction in economic growth, it is followed by a reduction in the US trade deficit. ^[11]

See also

• List of the largest trading partners of the United States
• Current account

As of December 2006 and according to the US Census, the ten largest trading partners of the United States represented roughly two thirds of imports and exports. ... Blue = countries in current account surplus; Red = countries in current account deficit, 2005 The current account of the balance of payments is the sum of the balance of trade (exports less imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as...

Notes

External links

• Are Trade Deficits a Drag on U.S. Economic Growth?
• Where Do U.S. Dollars Go When the United States Runs a Trade Deficit? from Dollars & Sense magazine
• The Economic Impact of a U.S. Slowdown on the Americas from the Center for Economic and Policy Research