Trade Balances

Trade balance refers to the difference between countries imports and exports for a period of time. But before we continue on trade balance, I find it necessary to first know how trade balance comes about and its relevance on the countries economy.

For starters let’s first look at balance of payment.

What is balance of payment (B.O.P)

Balance of payment measures the all transactions made between the residents or entities of a country with other countries over a defined period of time such as quarterly or yearly.

It is composed of the three elements, that is : The country’s current accounts, capital account and financial accounts.

The current account reflects  international payments and the trade balances ( trade of goods and services between countries). This involves exports ( goods that are domestically produced and sold abroad on the international market) and imports (foreign produced goods bought from other countries and to the country for domestic consumption).

The capital account: Measures the monetary flow between countries used to purchase financial assets like stocks, bonds and others. For instance if you buy stocks on the New York stock exchange market and you are not a citizen, you are putting money into the US economy hence increasing their  capital account.

The financial accounts: Measures change in domestic ownership of foreign assets and foreign ownership of domestic assets. For example if a country sells off its assets like corporate stocks, commodities or gold, those assets will be owned by foreigners. if it buys assets from other countries, the it increases on the assets owned outside the country.

Of the three elements, the current account is the most important because it measures the country’s trade balances. Trade balance /balance of trade has a direct effect on the country’s economy compared to others.

Let’s see how 

It is composed of the country’s exports and imports. This shows the country’s income generated from abroad on exports in relation to money spent a broad on imports.

The trade balance between countries affects the supply and demand of currencies in the economy.

If the country’s exports are greater than its imports, it reflects a trade surplus. This means there is high demand for the country’s domestic products a broad which in turn leads to rise in prices of those goods hence currency appreciation in value as well. This is a good sign for the country’s economic growth.

On the other hand, if the imports become greater than exports, it indicates a trade deficit. This is a sign of less demand for the country’s products on the foreign market which may result to cheap prices hence fall in value of the currency.

This is commonly used by economist and traders to gauge the strength of the country’s economy in relation to other countries. As a forex trader, you will sell the currency when its value falls and buy when its value appreciates.

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