Balance of trade (BoT) is a part of Balance of Payment. BoT is the difference between visible goods of a country with the rest of the world. It comprises of goods which can be seen, touched and measured. It is also known as Merchandise goods. It is a part of current account in Balance of Payment. It is also known as net exports or trade balances.
Balance of Trade = Export of Goods-Import of Goods.
India in the year 2018 exported 1 billion worth of goods and imported 1.7 billion worth of goods.
So, BoT in this case will be :
Balance of Trade= 1- 1.7 billion
= -0.7 billion
In this case India has a negative BoT, which means that it has imported more goods rather than exporting.
USA in the year 2018 Exported 2 billion worth of goods and imported 1.5 billion of goods.
So, BoT in this case will be:
Balance of trade = 2-1.5 billion
= 0.5 billion
In this case the Balance of Trade is positive, which means a country has exported more goods as compared to imports.
Components of Balance of Trade:
BoT constitutes only visible goods or merchandise goods. Invisible services or unilateral transfers are not a part of BoT. Invisible services includes such as shipping, insurance, expenditure by the tourist etc. These are a part of current account but not of Balance of Trade.
Significance of Balance of Trade:
If a country has a favourable BoT or the exports are more than imports than it means a country is more self reliant. It means it has surplus in Balance of trade. It’s a good indicator of country’s health. It means a lot of internally produced goods are being consumed all over the world. And the business conditions are good for investments.
If there is a negative BoT or unfavorable BoT, it means imports are more than exports. Which further means that a country is depended on other countries for fulfilling the requirements of its citizens. And in the case of large deficiet, sometimes we also need to take loans for repayments, which again affects the economy of country.
In case of India, it’s rare to have a positive Balance of Trade.