Microeconomic Indicator in FOREX:
Balance of Trade
What is the Balance of Trade?
Balance of Trade is nothing but the difference between the country’s total amount of exports and the total amount of imports in a given period of time. This can be considered as a part of the broader economic unit ‘Balance of Payments’ which includes capital movements. Balance of trade is generally represented in the units of currency of that particular country. It is the most important component of the county’s current account. This current account measures the net income of the country which is earned on international assets. It also includes trade balance and other payments across borders.
Balance of trade is the easiest component to measure as all the exports and imports of the country should pass through the customs office. If the exports of the country exceed its imports, the country is said to have a favourable balance of trade, AKA Trade Surplus. Likewise, if the imports of the country exceed its exports, the country is said to have an unfavourable balance of trade, AKA the Trade Deficit. Generally, most of the countries create trade policies that boost trade surplus, because it is considered as a profit for the country. This doesn’t hold true all the time. Countries sometimes consider trade deficit as a favourable trade balance. For example, Hong Kong has a trade deficit for a long time now. This is because its imports consist of most of the raw materials but most of its exports are finished goods which are made from these raw materials.
What does the Balance of Trade measure?
Balance of Trade measures the net exports and imports of goods in a country in a given time period. It is one of the major components of the country’s current account. Trade balance doesn’t include international investment flows and current transfers. It measures both the visible and invisible trades. This means, the balance of trade measure the trades of not just goods, but also services.
Reliable sources of information on ‘Balance of Trade’ for Major currencies:
There is a lot of information with respect to the Balance of Trade in the sources provided below. You can familiarize yourself with the Balance of Trade of the respective country along with the historical data related to that. You can also compare the trade balance of one country to the other using this web portal. The graphical representation of the historical data will give you a clear understanding of how this data changed over time. You also get to change the graphical representations according to your preference. A ton of more information related to the latest news in that regard is provided to give you a better understanding.
GBP (Sterling) – https://tradingeconomics.com/united-kingdom/balance-of-trade
What do traders care about the Balance of Trade and its impact on the currency?
Balance of Trade has a direct impact on the country’s currency. If the exports of a country are more than it imports, we can say that there is a high demand for its goods in the global market. This will directly have a positive impact on that country’s currency as the demand for its currency also increases. This happens because, if the demand for the products is high, prices rise and the value of the currency increases. Conversely, if the country’s imports are more than its exports, it indicates that there is less demand for the products produced by that country globally. Hence there will be relatively less demand for its currency as well, eventually resulting in the value depreciation. Hence, traders will generally look at the monthly trade balance report and forecast the currency appreciation and depreciation of that country’s currency. If the country is in the trade deficit from a long time, that would be a red flag. However, currency appreciation and depreciation don’t solely depend on the trade balance alone, but it is one of the important factors.
Frequency of the release
The trade balance reports of a country are generally released at the end of every month. Annual numbers are published generally at the end of every financial year. The dates of release may slightly differ, but the frequency is on a monthly basis. For example, both US and Euro countries publish their trade balance reports on a monthly basis, the US releases 35 days after the month ends but Euro countries releases their reports 45 days after the month ends. Countries tend to compare the current month’s trade balance with the same month’s trade balance in the previous year. This will help countries to accurately measure and compare the surplus or deficits in the trades.
The Bottom Line
Balance of trade is rather a simple concept and very easy to calculate but it explains a lot about the economics of the country. Unfavourable balance of trade or trade deficit can confer a lot of negatives for a country. Persistent trade deficits will have predictable negative consequences on the economic stability of the country. Employment of the country gets affected and domestic jobs may be lost to those abroad if the imports have more demand than the country’s exports. It has a strong impact on the country’s currency and exchange rates as well. Interest & Inflation rates will also get affected as the currency value depreciates due to the consistent trade deficit. Having all of this said, according to some economists, trade deficits might just be a simple reflection of consumer preferences and would not matter much at all in the long run. Therefore, just studying trade balance alone won’t be that valuable, but a combination of this with other major macroeconomic indicators would give you a holistic picture.