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Balance of trade

Balance of trade figures are the sum of the money gained by a given economy by selling exports, minus the cost of buying imports. They form part of the balance of payments, which also includes other transactions such as international investment.

The figures are usually split into visible and invisible balance figures. The visible balance represents the physical goods, and invisible represents other forms of trade, e.g. the service economy.

A positive balance of trade is known as a trade surplus and consists of exporting more (in financial capital terms) than one imports. A negative balance of trade is known as a trade deficit and consists of importing more than one exports. Neither is necessarily dangerous in modern economies, although large trade surpluses or trade deficits may sometimes be a sign of other economic problems.

If the balance of trade is positive, then the economy has received more money than it has spent. This may appear to be a good thing but may not always be so. An example of an economy in which a positive balance of payments is generally regarded as a bad thing is Japan in the 1990s. Because Japan had a consistently positive balance of payments, it had more currency than it could effectively invest. This led to huge Japanese overseas purchases of items such as real estate, which were of questionable economic usefulness. Furthermore, the protectionist measures that created the positive balance of trade also caused the price of goods in Japan to be much higher than they would have been had imports been freely allowed.

Negative balances are not necessarily terrible news, either. Paul Samuelson has argued that the consistent negative balance of trade that exists in the United States is due to high confidence in the United States' currency. Because the United States dollar is generally regarded to be extremely stable, dollars which are exported are held by persons overseas and there is no pressure to return them to the United States. So essentially the United States is able to export pieces of paper and get real goods and services in return. A countering view, by Henry Liu, is that it is pricing of oil in US dollars that actually forces every nation and institution to hold some of its reserve in dollars in order to hedge against the rapid rises and falls in prices of this all-essential energy source. In this view, a shift of oil pricing into another currency such as the Euro would shift the advantage to the European Union no matter what people thought of its currency.

Factors that can affect the balance of trade figures include:

Measuring the balance of payments can be problematic, due to problems with recording and collecting data. As an illustration of this problem, when official data for all countries in the world is added up it appears that the world is running a positive balance of payments with itself. The total reported amount of exports in the world is greater by a few percent than the total reported amount of imports. This cannot be true, because all transactions involve an equal credit or debit in the account of each nation. The discrepancy is widely believed to be explained by transactions intended to launder money or evade taxes, and other visibility problems.

The Bretton Woods agreement and the institutions founded on it were set up in part to ease trade and payments concerns after World War II. These institutions, and the World Trade Organization after it, were and are roundly criticized for the inability of their mechanisms to deal with triple bottom line concerns, or limit the competition to provide pollution credit and deal sanely with agricultural policy. This last usually retards exports from developing nations to developed ones, which usually prop up at least their own family farmers. However, not doing so leads to failures of food security and an ever-expanding Ecological Footprint due to a lack of disincentive to consume imports or import biosafety-threatening organisms.

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