Balance of Trade

Balance of Trade, the record of a country's transactions with the rest of the world. In theory, the sum of the balances of trade for all nations in the world should be zero, because one country's payment is another's receipt. In fact, there is a large world deficit.

The balance of trade has two accounts which by definition must balance. The current account consists of: visible trade (the export and import of goods, sometimes referred to as merchandise trade); invisible trade (payments and receipts for services such as banking, shipping, and tourism, plus income in the form of dividend or interest payments ); private transfer payments such as remittances from nationals working abroad; official transfers such as payments to international organizations. The capital account consists of transactions that relate to a country's assets and liabilities; for example, inward and outward investment, foreign loans and borrowings.

The figure arrived at by adding the capital and current accounts together is brought into balance by borrowing or lending and changes in reserves. If a currency is floating, the central authority can help achieve balance by adjusting the value of the currency. When exchange rates are fixed, the central authority must either (if in deficit) sell gold or foreign currency in exchange for its own currency, or (if in surplus) use its own currency to buy gold or foreign currency. Because trade is difficult to measure accurately, balance of trade statements include an errors and omissions item that is sometimes large.

In the past many governments used import tariffs or quotas in their attempts to correct imbalances in trade. Today, as a result of a proliferation of free-trade agreements such as those under the General Agreement on Tariffs and Trade and the World Trade Organization, protectionist measures of this kind are now in many cases outlawed or restricted.