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

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

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

• 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.

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

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.