Balance of Trade

Difference between the value of total imports and exports of a country over a specific period of time.
The merchandise balance of trade refers to the difference between a country’s merchandise exports and merchandise imports. If exports exceed imports, a trade surplus or favorable balance of trade is being realized. If imports exceed exports, a trade deficit or unfavorable balance of trade occurs. Since the early 1980s, the United States has experienced a rapidly growing international trade deficit, in which imports exceed exports. The Survey of Current Business, published in March 1985, showed that during the previous year the U.S. merchandise exports of $220 billion did not earn the nation enough foreign monies to finance its merchandise imports of $328 billion. In March 2003 the United States imported $126.3 billion and exported $82.8 billion for a trade deficit of $43.5 billion.
Causes of the trade deficit included an appreciated dollar, relatively rapid expansion of the American economy, and curtailed purchases of U.S. exports by less-developed countries. The effects of this expanding trade deficit have been manifold. It has had a contractionary, anti-inflationary impact on the U.S. domestic economy. American exportdependent industries have experienced declines in output, employment, and profits, thereby generating political pressures for protection.However, the trade deficit has also meant an increase in the living standards of American consumers.
The basic theory of trade explains trade patterns in terms of competitive supply and demand. Three variants of the basic theory emphasizing the supply side are Adam Smith’s theory of absolute advantage, David Ricardo’s principle of comparative advantage, and the Heckscher-Ohlin theory stressing factor proportions. Smith challenged the principles of mercantilism, which promoted the interests of the mother country at the expense of the colonies, and argued for free trade on the basis of cost-efficiency, with the only exception being national defense. Ricardo argued that, under the principle of comparative advantage, a country benefits by producing more of those goods in which it is relatively efficient and exporting them in return for goods that could only be produced inefficiently. The principle of comparative advantage assumed constant marginal costs (a rate that barely covers cost). Dropping Ricardo’s constant-cost assumption to allow for increasing marginal costs makes it easier to explain why countries do not specialize completely. Heckscher-Ohlin explained trade patterns based on the fact that different goods use the factors of production (such as cost of raw materials and labor) in different ratios and that nations differ in their relative factor endowments. The theory also explains that trade patterns predict that nations tend to export the goods that use their abundant factors more intensively in exchange for the goods that use their scarce factors less intensively.
International trade has been slowly drifting toward trade among similar countries and toward trade in similar goods rather than trade between very different industrial sectors. A greater and greater share of world trade consists of intraindustry trade (IIT), or two-way trade within industrial categories. A challenge for trade theorists is to explain what is special about trade of knowledge-intensive goods such as software, why we have so much IIT, and whether the conclusions of the standard model (used to determine the standard for profits) about the gains from trade still hold in a world of IIT in knowledge-intensive goods.

References
Lindert, Peter H. International Economics. Homewood, IL: R. D. Irwin, 1991.
McConnell, Campbell R. Economics: Principles, Problems, and Policies. New York: McGraw-Hill, 1963.
See also: Export Control Act; Free Trade.