balance of trade
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balance of trade,relation between the merchandise exports and imports of a country. The concept first became important in the 16th and 17th cent. with the growth of mercantilismmercantilism
, economic system of the major trading nations during the 16th, 17th, and 18th cent., based on the premise that national wealth and power were best served by increasing exports and collecting precious metals in return.
..... Click the link for more information. . Mercantilist theorists believed that a country should have an excess of exports over imports (i.e., a favorable balance of trade) to bring money, which they confused with wealth, into the country. They urged legislation to restrict the use of foreign goods, encourage exports, and forbid the export of bullion. The importance of a favorable balance of trade remained unchallenged until David HumeHume, David
, 1711–76, Scottish philosopher and historian. Educated at Edinburgh, he lived (1734–37) in France, where he finished his first philosophical work, A Treatise of Human Nature (1739–40).
..... Click the link for more information. , Adam SmithSmith, Adam,
1723–90, Scottish economist, educated at Glasgow and Oxford. He became professor of moral philosophy at the Univ. of Glasgow in 1752, and while teaching there wrote his Theory of Moral Sentiments
..... Click the link for more information. , David RicardoRicardo, David,
1772–1823, British economist, of Dutch-Jewish parentage. At the age of 20 he entered business as a stockbroker and was so skillful in the management of his affairs that within five years he had amassed a huge fortune.
..... Click the link for more information. , and John Stuart MillMill, John Stuart,
1806–73, British philosopher and economist. A precocious child, he was educated privately by his father, James Mill. In 1823, abandoning the study of law, he became a clerk in the British East India Company, where he rose to become head of the examiner's
..... Click the link for more information. concerned themselves with theories on the adjustment of balance of trade. The classical theory of the mechanism is that a country whose exports fall short of its imports must export part of its stock of gold, thereby affecting its price structure and its ability to compete on the world market. Today the balance of trade is regarded as only one of several elements that make up the balance of paymentsbalance of payments,
balance between all payments out of a country within a given period and all payments into the country, an outgrowth of the mercantilist theory of balance of trade.
..... Click the link for more information. of a nation; the U.S. Dept. of Commerce issues reports on the current status of the balance of trade in goods and services on a monthly basis. Since the 1980s the value of U.S. imports has greatly exceeded exports, resulting in large trade deficits that complicated U.S. relations with its trading partners, particularly Japan, China, and the United States' partners in the North American Free Trade AgreementNorth American Free Trade Agreement
(NAFTA), accord establishing a free-trade zone in North America; it was signed in 1992 by Canada, Mexico, and the United States and took effect on Jan. 1, 1994.
..... Click the link for more information. , Canada and Mexico.
Balance of Trade
the difference between the value of a country’s exports and imports during a given period, usually a year. The balance of trade includes the value of commodities purchased and sold for cash, as well as on credit; it also reflects the value of goods furnished without compensation as foreign aid. With a deduction made for goods in the last category, the balance of trade is incorporated into the balance of payments.
The export side of the balance of trade reflects the export of goods produced, grown, or extracted within a given country, as well as of goods previously imported and subjected to processing. The import side comprises goods that are imported either for domestic consumption or for processing and subsequent export. The difference between the two sides constitutes the balance, which is said to be favorable if the value of exports exceeds that of imports and unfavorable if the opposite holds. If neither side is greater, exports and imports are said to be in balance.
A country’s balance of trade is compiled by its statistical, financial, and foreign trade organs and is used to evaluate the international economic position of the country, the level of competitiveness of its domestically produced commodities, and the purchasing power of its currency. Since the methods used in computing the values of exports and imports vary from country to country, comparisons of statistics are not always possible. The Statistical Office of the United Nations has recommended that countries adhere to the same method in computing indicators for international trade. In particular, in compiling the balance of trade, the office recommends that the value of imported goods be measured on a CIF basis and that of exported goods be taken on an FOB basis. Thus, the value of an imported commodity would include its cost either at the border or in a port of the country of exportation; it would also reflect the outlays for freight and insurance necessary to bring the commodity to the border of the importing country. The value of an exported commodity would include, aside from its cost at the factory, all expenses incurred in bringing the commodity to either a port of exportation or to the border of the producer’s country and all export taxes and similar levies. Most countries follow the recommendations of the Statistical Office. Approximately 30 countries, among them the socialist countries, compute the value of both imports and exports on an FOB basis.
The trade balances of capitalist countries reflect the spontaneous, anarchic nature of the capitalist economy’s development; they are also affected by inflation, the monetary crisis, and the intensified struggle for markets. The unevenness of capitalism’s economic and political development is manifested in the changing power relationships between the competitors, the outbreak of trade wars, and the economic and customs groupings of the imperialist states. Capitalist countries seek to bring their exports and imports into balance through the use of customs duties, import quotas, tax incentives, favorable credit terms, government subsidy of exports, devaluation, revaluation, and floating exchange rates.
In the early 1970’s, the trade balances of many developed capitalist countries were chronically unfavorable. Thus, during the period 1970–74 the US trade deficit totaled $7.4 billion; that of Great Britain was £13.2 billion, and the deficit of France totaled 47.3 billion francs. In 1974 all the imperialist countries except Canada and the Federal Republic of Germany had high trade deficits, mainly because of the high prices set by the oil cartels on petroleum and petroleum products.
The trade balances of the socialist countries reflect the planned, orderly development of the economy, especially of foreign trade; they also reflect the deepening international (socialist) division of labor and the development of a world socialist market. As a rule, the trade balances of the socialist countries are favorable, although for certain years and certain countries they have shown deficits. For example, during the first five-year plan (1929–32) the USSR’s trade balance was unfavorable because of the necessity to import machinery and equipment on a large scale in order to create a strong industrial base for the country. In subsequent years, a steady excess in the value of exports over imports was ensured in the USSR.
Trade relations between the socialist countries are based on equality, mutual advantage, and a commitment to cooperation and socialist economic integration. This basis ensures that the exports and imports of each country will be in balance, a balance necessary to the economic development of each country and of the entire socialist community.
V. B. PANICH