A balance of trade surplus exists for a country when the value of exports produced by the domestic economy and purchased by the foreign sector is greater than the value of imports produced by the foreign sector and purchased by the domestic economy. In other words, exports exceed imports and net exports are positive.
This is also commonly termed a favorable balance of trade because the excess of exports over imports creates a net inflow of monetary payments into a country. This generates an increase in aggregate income and associated measures, especially consumption, saving, investment, and tax revenue, which is rightfully considered to be "favorable" for the country.
A given country can have an "overall" balance of trade surplus in which exports to the foreign sector exceed imports from the foreign sector. One country can also said to have a balance of trade surplus with just one other country, in which exports to that country exceed imports from that country. For example, the United States might have an overall balance of trade deficit with the foreign sector, but a balance of trade surplus with Canada. An overall balance of trade surplus with the foreign sector does not necessarily mean a balance of trade surplus for every other country.
Balancing Net ExportsThe 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.
A balance of trade surplus then exists if exports exceed imports or net exports are positive. In contrast, a balance of trade deficit exists if imports exceed exports or net exports are negative. The balance of trade can also be "in balance" if exports equal imports and net exports are zero.
Why? How?A balance of trade surplus arises if exports exceed imports. Why does this happen? How might this occur?
The simple answer is that a country is exporting more goods and services to the foreign sector than it is importing from the foreign sector. A more complex answer requires a closer look at both exports and imports.
- Exports: An increase in exports is just the thing that can create a balance of trade surplus. This might occur for reasons beyond control of the domestic economy, perhaps due to rising prosperity and a booming economic activity in the foreign sector. Or an increase in exports might result from policy actions taken by the domestic economy specifically designed to increase exports, including subsidies to export producers or manipulation of currency exchange rates both of which can lower the effective price of exports.
- Imports: A balance of trade surplus can also result from a decrease in imports. This might occur when domestic expenditures (especially consumption) is induced to decrease by a contracting domestic economy. Or a decrease in imports might result from policy actions specifically designed to reduce imports, including quotas or tariffs on imports or manipulation of currency exchange rates.
What It Means?Why exactly is a balance of trade surplus considered "favorable" or beneficial for the domestic economy. 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 are coming in for the sale of exports than are going out for the purchase of imports.
The net inflow of payments means that the pool of aggregate revenue or income available to the domestic economy is greater than it might be otherwise. That is, domestic producers, on net, have extra revenue that is either distributed to resource owners as national income or diverted to the government sector as taxes.
This extra income and tax revenue can then be used to induced consumption expenditures, saving (which is the used for investment expenditures), and government purchases. More revenue means more income which means more expenditures and more production. The result is higher living standards and a more prosperous economy. This is why a balance of trade surplus is also commonly termed a "favorable" balance of trade.
Ironically, however, a balance of trade surplus, which is deemed to be "good" for a country might arise because the domestic economy has dipped into a serious business-cycle contraction. The declining economy and resulting drop in aggregate income induces a decrease in domestic consumption expenditures, including the purchase of imports from the foreign sector.
This decrease in imports can transform a balance of trade deficit into a balance of trade surplus, especially if the foreign sector remains prosperous and exports do not change. As such, while a balance of trade surplus is "favorable" for the domestic economy, it might actually be a sign that the domestic economy is not doing so well at the moment.
Favorable for All?That notion that a balance of trade surplus is "favorable" comes not only from the domestic view of the overall domestic economy, but also from the perspective of domestic producers. International trade is invariably good for some and bad for others. When the domestic economy trades with the foreign sector, domestic producers and domestic consumers do not benefit to the same degree.
Because exports exceed imports with a balance of trade surplus, domestic producers, on net, benefit whereas domestic consumers, on net, suffer. The end result is that a balance of trade surplus is "favorable" to domestic producers but often "unfavorable" to domestic consumers.
- Exports: First consider exports. Domestic producers that provide exports benefit from greater sales, more revenue, and higher profit. Resource owners engaged in the production of exports also gain from higher income. However, because domestic consumers are competing with the foreign sector, the prices of exports tend to rise and their availability tends to be less. Domestic consumers are often hurt by greater exports.
- Imports: On the import side, the story is largely reversed. Domestic producers competing with imports suffer from lower prices and fewer sales. They have less revenue and resource owners doing the production have less income. Domestic consumers, in contrast, benefit from lower prices and a greater selection of goods.
The "favorable" descriptor is commonly attached to a balance of trade surplus, in part, due to the aggregate impact on the domestic economy, but also in part because domestic producers tend to have more clout and their preferences tend to be more widely recognized than domestic consumers.
Balance of PaymentsThe 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 include net transfers or gifts between the domestic economy and the foreign sector (primarily foreign aid between governments) and net investments in both physical capital and financial capital.
The overall balance of payments is necessarily in balance, with neither a surplus nor a 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 transfers and investments.
Put another way, the domestic economy uses the extra revenue it receives from the net sales of exports for either foreign aid to other countries or to invest in the physical or financial capital of other countries.
BALANCE OF TRADE SURPLUS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2017. [Accessed: October 17, 2017].