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by Valentino Piana (2006)



1. Significance
2. Composition
3. Determinants
4. Impact on other variables
5. Long-term trends
6. Business cycle behaviour
7. Data
8. Formal models

9. Related papers

Bilateral import promotion as a key to trade balance improvement



Net trade with foreigners: exports less imports. A trade deficit means that exports are insufficient to pay for exports; a trade surplus, the opposite.

Sometimes called "net exports", the trade balance is a component of GDP, to the effect that a perfectly equilibrated trade balance makes the GDP dependent only on domestic values (consumption, public expenditure, investments).

A simultaneous increase of both imports and exports by the same amount leaves unaltered the trade balance. Any difference in dynamics between exports and imports has a multiplied effect on trade balance.


Trade balance is usually decomposed by product and by country (bilateral trade balances). Relevant is the degree of concentration of the imbalance in trade caused by one or few commodities. If concentration is high, a targeted industrial policy could improve the balance (e.g. reduce the imbalance).

On the other hand, if a deficit is due only to few partners, proactive and consensus-based trade negotiations with them could fairly quickly set the problem.

Although less general than trade balance, which includes both goods and services, the "merchandise balance", which includes only goods and not services, is sometime used because of better data availability.



Convergent or divergent dynamics of imports and exports are the first causes of trade balance changes.

Everything that impact asymmetrically on imports and exports can impact the trade balance. In particular price and non-price competitiveness is relevant. If external pressure forces down the prices at which a country sells its exports, than a trade deficit is more likely ("terms of trade" effect). In other words, in a hierarchical world, trade balance can reflect political balance of power.

A faster GDP growth than trade partners' ones usually results in trade deficit, since imports are elastic to GDP (they rise more than proportionally).

Currency reak exchange rate can be very important: possibly due to a fixed exchange rate and a higher inflation rate than commercial partners, an overvaluation of the domestic currency can lead to deep trade deficits on most products and with most countries. A sharp devaluation can dramatically improve all these relationships.

If financial transaction are particularly intensive and autonomous, an inflow of FDI can lead to higher imports (of production inputs for the new foreign-owned plants), also because of revaluation of currency. Hopefully, this short-run effect will be balanced by more exports in the future. In this cases, trade balance is adjusting to financial movements.


Impact on other variables

Trade balance is a component of GDP: other things equal, a surplus increases GDP and deficit reduces it. If this impact is strong enough, it gives rise to the traditional Keynesian multiplier effect with consumption moving in the same direction.

In financial terms, trade balance influence the total size and the composition of the current-account balance and, more broadly, it influences the balance of payments (which comprehends not only the trade balance but also income payments, loans and aid from abroad, etc).

In particular, long-lasting trade deficit can lead to foreign debt, on which a country has to pay interests. If this debt is judged by market agents as unsustainable, a currency crises can erupt. Even before that this perspective materialises, the government can be induced to dampen GDP growth.


Long-term trends

Trade imbalances are widespread throughout the world and persistent over time.

In order to reduce the gap with rich countries, poor countries have to rise much faster than them, which are usually their main commercial partners. But this leads to trade deficit, which risks to jeopardize growth with alternate phases of "stop-and-go".

Business cycle behaviour

Trade balance tend to be strongly anti-cyclical: in boom periods it usually exhibits deficits, whereas in recessions a trade surplus can help inverting the business cycle. The reasons are explained in depth here and here.


Bilateral trade balance among 186 countries (a time series of 52 years)

Net export data from 136 countries: a long term time series

Bilateral merchandise balance among 99 countries (1998 and 2003)

Formal models

An interactive map of how the economy works according to a basic macroeconomic scheme: the IS-LM model

Related papers

Hierarchy structures in world trade

Russian State Policies in Current Foreign Trade

Country concentration of Turkish exports and imports over time

Persistent trade deficit, overvaluation and protectionism

Evolution in the terms of trade and its impact on developing countries (2005)

Bilateral import promotion as a key to trade balance improvement


Key concepts
  World trade  
  Business cycles