Balance of trade can be defined as the difference between the financial value of exports and imports of a country within a certain period of time.

If the amount of exports of a country is more than imports then it is known as the trade surplus, which means the goods produced by the country are in demand in the international market.

If the amount of imports of a country is more than exports then it is known as the trade deficit, which means the goods produced in the country do not have a great demand in the international market. This is also known as the trade gap in local terms.

Balance of trade is not only applicable to import and export of goods, but it is also applicable to import and export of services in terms of workmanship.

The balance of trade is also attributed to the self sufficiency of the country based on the types of products that country is able to produce on its own and the types of products that country has to purchase from other countries.

Arriving at the balance of trade is a bit difficult due to the difficulty involved in collecting the correct data, accuracy is highly unlikely and a near to correct figure is the reality.

The important things that contribute to influence the balance of trade of a country are as follows:

• The exchange rates of the currency
• Goods produced in the country, supply and demand.
• The trade agreements and contracts of the country.
• The different kinds of tax measures involved in the process.

Factors contributing to the trade deficit:

• Importing products to cater to the domestic demands of the country
• Heavy foreign investment improves the economic growth of the country and at the same time causes trade deficit.
• For an export dependent economy, if there is a sudden decline in demand, then it causes trade deficit.
• A poor savings rate in the country also contributes to the trade deficit.

Factors contributing to the trade surplus:

• If the businesses within the country are able to cater to the complete domestic demands of the country.
• Self sufficient economies have a trade surplus.
• For an export dependent economy, if there is a sudden increase in demand, then it causes trade surplus.
• A high savings rate in the country also contributes to the trade surplus.

In some cases where the products of the country are in demand elsewhere in the world, there will be an increase in export to the extent that domestic demand for the product will not be met due to the greed of the traders for foreign revenue. In such cases the local businesses dependent on such raw materials will see a negative shift. Such things also contribute to the minor discrepancies in statistical data assessed for balance of trade.

Trade deficit is dangerous and the value of the currency of the country is mainly based on the balance of trade.

It should be noted that the physical balance of trade is different from the monetary balance of trade.

• The physical balance of trade is defined in terms of the raw materials. Many rich countries have a negative monetary balance of trade because they get the raw materials from the developing countries for low cost
• They make new products and sell it to the same country, and so they name a positive and improved physical balance of trade.