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MARGINAL COST AND MARGINAL PRODUCT: Because variable cost is largely associated with the cost of employing a variable input in the short run, it's possible to identify a connection between the marginal cost curve and the marginal product curve. In particular, the quantity of output in which marginal cost is at a minimum, is the same quantity of output produced by the variable input when the marginal product of the variable input is at a maximum. In addition, over the range of production in which the variable input experiences increasing marginal returns and marginal product increases, the marginal cost curve declines. And over the range of production in which the variable input experiences decreasing marginal returns brought on by the law of diminishing marginal returns and marginal product increases, the marginal cost curve is rising.

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BALANCE OF TRADE:

The difference between the value of goods and services exported out of a country and the value of goods and services imported into the country. The balance of trade is the official term for net exports that makes up the balance of payments. The balance of trade can be a "favorable" surplus (exports exceed imports) or an "unfavorable" deficit (imports exceed exports). The official balance of trade is separated into the balance of merchandise trade for tangible goods and the balance of services.
The balance of trade is a key indicator of international trade for a country. It summarizes net exports, the difference between exports to the foreign sector and imports from the foreign sector. From the perspective of the domestic sector of a given nation, a favorable balance of trade is achieved if net exports are positive or the balance of trade is in surplus. An unfavorable balance of trade is then achieved if net exports are negative and the balance of trade is in deficit.

While the "overall" balance of trade for a given country is quite important (summarizing net exports with the entire foreign sector), the balance of trade relative to another country is also noteworthy. For example, the United States might have an overall balance of trade deficit, but a balance of trade surplus with Canada.

Net Exports

The balance of trade is essentially another term for net exports. Net exports are the difference between exports to the foreign sector and imports from the foreign sector. Exports are goods and services produced by the foreign sector and purchased by members of the domestic economy. Imports are goods and services produced by the domestic economy and purchased by the foreign sector.

Whereas the net exports phrase surfaces in most theoretical analyses of the macroeconomy, the balance of trade term tends to be more common in the official measurement of foreign trade.

Goods and Services

The official balance of trade is actually divided between tangible goods and intangible services. Official foreign trade trackers track both the foreign trade of goods and the foreign trade of services. The result is a balance of trade for goods, officially termed the balance on merchandise trade, and the balance of trade for services, officially termed the balance on services.

Although most people likely think of the exporting and importing of tangible, physical goods when thoughts turn to foreign trade, the exchange of services is also extremely important. Most certainly the exporting and importing of such tangible goods as cars, oil, computers, bananas, and underwear is central to the balance of trade. But so too is the importing and exporting of intangible services, such as education, entertainment, and health care.

For example, a foreign student who enters the domestic economy in pursuit of an education, paying tuition in the process, is exporting services to the foreign sector. Alternatively, a domestic citizen who visits a foreign land to soak up a bit of vacation sunshine, paying for local hotel accommodations in the process, is importing services from the foreign sector.

Surplus and Deficit

In the same way that net exports can be either positive or negative, meaning exports exceed imports or imports exceed exports, the balance of trade can have either a surplus or deficit.
  • Balance of Trade Surplus: A surplus in the balance of trade arises if the value of exports exceeds the value of imports. In terms of "payments," this indicates that the domestic economy is receiving a net inflow of payments from the foreign sector. More payments coming in than going out means the domestic economy has more income and enhanced living standards. For this reason, a balance of trade surplus is also commonly termed a "favorable" balance of trade.

  • Balance of Trade Deficit: A deficit in the balance of trade arises if the value of imports exceeds the value of exports. In terms of "payments," this indicates that the domestic economy has a net outflow of payments to the foreign sector. Fewer payments coming in than going out means the domestic economy has less income and limited living standards. For this reason, a balance of trade deficit is also commonly termed a "unfavorable" balance of trade.
Whether the balance of trade is in surplus or deficit, and thus "favorable" or "unfavorable" comes not only from the domestic view of the overall domestic economy, but also from the perspective of domestic producers.

A balance of trade surplus is most favorable to domestic producers responsible for the exports. However, this is also likely to be unfavorable to domestic consumers of the exports who pay higher prices.

Alternatively, a balance of trade deficit is most unfavorable to domestic producers in competition with the imports, but it can also be favorable to domestic consumers of the exports who pay lower prices.

Balance of Payments

The balance of trade is actually one component of a more extensive set of international financial accounts termed the balance of payments. The balance of payments summarizes ALL payments between the domestic economy and the foreign sector. While payments for exports and imports constitute a major portion of these payments, they are not the only payments.

Other payments contained in the balance of payments are:

  • Unilateral Transfers: Transfers are essentially gifts, payments without the receipt of anything in exchange. In the balance of payments, unilateral transfers are gifts between the members of the domestic economy and the foreign sector. These gifts are between individuals, businesses, and governments. In fact, the bulk of unilateral transfers are usually gifts from the government of the domestic economy to governments in the foreign sector, that is foreign aid.

  • Investments: Members of the domestic economy buy physical and financial assets located in the foreign sector and members of the foreign sector buy physical and financial assets located in the domestic economy. These assets included capital goods (factories and the like) as well as bank accounts and foreign currencies. Payments for the purchase of these assorted assets are also included in the balance of payments.
While the balance of trade can be in surplus or deficit, the balance of payments necessarily is in balance, neither surplus nor deficit. A balance of trade surplus, as such, means that other payments are in an equal and opposite deficit. If a given country has a net inflow payments on trade because exports exceed imports, then it has a corresponding net outflow of payments for unilateral transfers and investments. Likewise a net outflow of payments on trade because imports exceed exports corresponds with a net inflow of payments for unilateral transfers and investments. It all balances out.

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Recommended Citation:

BALANCE OF TRADE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: December 22, 2014].


Check Out These Related Terms...

     | balance of trade surplus | balance of trade deficit | balance of payments | balance on merchandise trade | balance on services |


Or For A Little Background...

     | net exports | international trade | international economics | net exports of goods and services | foreign sector | exports | imports |


And For Further Study...

     | terms of trade | gains from trade | absolute advantage | comparative advantage | law of comparative advantage | international market | foreign trade policies | tariffs | import quotas | export subsidies | trade barriers | foreign exchange market |


Related Websites (Will Open in New Window)...

     | World Trade Organization | North American Free Trade Agreement | General Agreement on Tariffs and Trade | European Union | International Monetary Fund |


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