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BALANCE ON MERCHANDISE TRADE:

A subset of the balance of payments current account that records the difference between the payments received for exports of goods to other nations and the payments made for the imports of goods from other nations. The goods included are physical or tangible goods, but not intangible services. The balance on merchandise trade is thus appropriately divided into merchandise exported and merchandise imported. Two other subsets of the current account include the balance on services and unilateral transfers. The commonly termed balance of trade is the sum of the balance on merchandise trade and the balance on services.
The balance on merchandise trade is one part of the current account of the balance of payments. It tracks payments for the exchange of tangible merchandise or goods, including those exported from the domestic economy to the foreign sector and those imported from the foreign sector to the domestic economy.

This part of the current account is also a key part of the balance of trade. The balance of trade includes both the balance on merchandise trade and the balance on services and is officially termed the balance on goods and services in the balance of payments account. The third part of the current account is unilateral transfers. In addition to the current account, the balance of payments also includes the capital account, which tracks the flow of investment payments in to and out of a country.

Balance of Payments for Northwest Queoldiola

Balance on Merchandise Trade
Balance on Merchandise Trade

To illustrate the balance on merchandise trade, consider the Republic of Northwest Queoldiola, a hypothetical country that is well suited for this task. Other real world countries, such as the United States, Brazil, or Lichenstein, have similar accounts (albeit with different numbers).

The chart to the right presents the hypothetical balance of payments for Northwest Queoldiola stated in terms of queolds, the hypothetical Queoldiolan currency. The balance of payments for real world countries is generally stated in terms of their domestic currencies (such as dollars for the United States or reals for Brazil).

First note that this chart contains two major sections, Current Account and Capital Account. Near the bottom of the chart is a summary Balance of the Current and Capital Accounts, which combines the two sections. At the very bottom is the overall Balance of Payments.

Highlighting the Balance on Merchandise Trade

The first task is to highlight the current account portion of the Northwest Queoldiola balance of payments chart. This can be done by clicking the [Current Account] button. The current account is a record of all trade between one nation and other nations. It includes payments for imports and exports of both goods and services. It also includes monetary gifts or transfer payments to and from other nations. This account is divided into three categories -- balance on merchandise trade, balance on services, and unilateral transfers.

Key to this present discussion are payments for the exporting and importing of tangible goods -- merchandise trade. The subset of the current account that tracks these flows can be highlighted with a click of the [Mer Bal] button. Note that this click highlights three lines in the balance of payments chart -- merchandise exported, merchandise imported, and balance on merchandise trade.

  • Merchandise Exported: The first line summarizes payments received by Northwest Queoldiola for exporting tangible goods to other countries, a value of 290.1 million queolds. This is a positive value because currency, queolds, is flowing in to the domestic Queoldiolan economy. Goods flow out and money flows in.

  • Merchandise Imported: The second line then summarizes payments paid out by Northwest Queoldiola for importing tangible goods from countries, a value of -162.3 million queolds. This is a negative value because currency, queolds, is flowing out of the domestic Queoldiolan economy. Goods flow in and money flows out.

  • Balance on Merchandise Trade: The third and last highlighted line is the summary balance on merchandise trade. It is the sum of the 290.1 million queolds received for merchandise exports and the -162.3 million queolds paid out for merchandise imports, a net value of 127.8 million queolds. Some currency flows in and some flows out. For Northwest Queoldiola more is flowing in that is flowing out. This surplus of exports over imports is just that thing that contributes to a balance of trade surplus. A negative value, in contrast, would contribute to a balance of trade deficit.

The Rest of the Current Account

The two remaining parts of the current account track the flow of payments for intangible services and unilateral transfers.
  • Balance on Services: This is the difference between the payments received for exports of services to other nations and the payments made for the imports of services from other nations. This includes only intangible services. Once again a summary balance is provided for the trade in services, which for Northwest Queoldiola is negative, meaning that it exports fewer services than it imports.

  • Unilateral Transfers: This is the difference between gifts or transfers received from other nations and transfers sent to other nations. In includes gifts or transfers between individuals, and perhaps more important, it includes transfers between governments. For Northwest Queoldiola transfers are positive because it receives more gifts from other countries than it gives out.

The Balance of Trade

The balance of merchandise trade is an important part of the balance of trade. The balance of trade is specifically identified as the sum of the balance on merchandise trade and the balance on services, which is technically termed the balance on goods and services.

For the hypothetical Northwest Queoldiola, this value happens to be a positive 70.5 million queolds. This is composed of 127.8 million queolds from the balance on merchandise trade and -57.3 million queolds from the balance on services. Even though services imported exceeds services exported, this service balance deficit is outweighed by the merchandise trade balance surplus for a overall balance of trade surplus.

<= BALANCE OF TRADE SURPLUSBALANCE ON SERVICES =>


Recommended Citation:

BALANCE ON MERCHANDISE TRADE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2017. [Accessed: October 21, 2017].


Check Out These Related Terms...

     | balance of payments | current account, balance of payments | capital account, balance of payments | balance on services | unilateral transfers | balance of trade | balance of trade surplus | balance of trade deficit |


Or For A Little Background...

     | international finance | international trade | international economics | foreign trade | money | currency | open economy | closed economy | foreign sector | domestic sector |


And For Further Study...

     | foreign exchange market | international market | free trade areas | trade barriers | foreign exchange | exchange rate | flexible exchange rate | fixed exchange rate | managed flexible exchange rate |


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

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


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