Global trade has not only nations and countries trading, but businesses as well. Companies will be sold and bought. Loans will be given from one place to another. Real estate investments may skyrocket. All of these dealings impact the economy of the world. This trading allows countries to expand their markets, thus allowing them to access goods and services that could not have been made available domestically. Due to this, there is more competitive pricing and it brings a less expensive product home for the consumer. So how does one go about measuring global trade? Read on for more information.
Global Trade Measurements
Global trade measures are split into two categories: balance of trade and balance of payments. Together, these two metrics are what help keep things balanced. Now, you may be sitting here wondering, “Okay that’s great, but what does it mean?”. Worry not, for we have you covered.
Balance of Trade
Simply put, the balance of trade is the difference between the value of a country’s exports and the value of its imports. As such, it should look something like this:
value of exports – value of imports = balance of trade
This calculation of the balance will yield two outcomes: a trade deficit or a trade surplus. A trade surplus is when a country exports more than it imports, while a trade deficit occurs when a country imports far more than it exports. However, countries can be in trade deficits with some places, while in a trade surplus with others. Think of it like your bank account: the balance shows the difference between your exports (deposits) and your imports (withdrawals).
Balance of Payment
This specific metric deals with the difference between the total flow of money leaving a country and the total flow of money entering a country during a period of time. While this metric is related to the balance of trade, this is a record of every single economic transaction between any individual, firm, or government and the rest of the world during a particular period. This balance of payments includes all transactions by a country, including imports and exports, services, foreign investments, financial capital, financial transfers, and loans and foreign aid. The calculation for this is as follows:
total money coming into a country (inflow) – total money going out (outflow) = balance of payments
With both of these formulas, it is important to use the formula as it is. Do not make changes or alter any sequence of values.
There is a temptation to conclude that trade surpluses and favourable balances of payments are always indicators of a strong economy at this point, but it’s not that simple. As with a person’s credit rating, the balance of trade and the balance of payments are starting points. Many factors influence how the numbers are interpreted and viewed by the country’s leaders, other countries, and the world, including where a country is in its economic development, what contributes to the balance of trade or payments, the state of the global economy, how the country imports, etc. The assessment of these factors can be highly political, as you might expect.
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