Balance of Trade
Notes
The Balance of Trade (BoT) is the difference between the value of a country's exports and imports of goods (visible items) over a period. A trade surplus (exports above imports) is favourable; a trade deficit is unfavourable. The BoT of goods is a part of the current account; the balance on services is separate.
Basis | Balance of Trade | Balance of Payments |
|---|---|---|
Coverage | Goods (visible) only | All transactions: goods, services, income, transfers, capital |
Scope | A part of the current account | A complete record, wider |
Balance | Can show a surplus or deficit | Always balances in accounting terms |
Includes capital flows | No | Yes |
Terms of trade
- Net barter terms of trade = (Index of export prices / Index of import prices) x 100. A rise means a favourable change (each unit of exports buys more imports).
- Income terms of trade (adjusted for export volume) and factor terms of trade.
India's trade
- Exports: engineering goods, petroleum products, gems and jewellery, electronics (including smartphones), pharmaceuticals, textiles, and agricultural goods (rice, marine products).
- Imports: crude oil, gold, electronics, coal, vegetable oil, machinery, and fertilisers.
- Partners: the USA, UAE, China, the Netherlands, and Saudi Arabia, among others.
- Foreign Trade Policy 2023-28 (effective April 2023; run by the DGFT); the Department of Commerce releases monthly trade data.
Theories: absolute advantage (Adam Smith), comparative advantage (David Ricardo) and the Heckscher-Ohlin factor-endowment theory.
Key Points
- BoT: exports minus imports of goods only.
- BoT is part of the current account; BoP is wider.
- Net barter terms of trade = (export price index / import price index) x 100.
- India's main exports: engineering goods, petroleum products, gems and jewellery.
- Theories: absolute and comparative advantage.
MCQs
Q1. The Balance of Trade includes: (a) Goods and services (b) Visible items (goods) only (c) Capital flows (d) Remittances Ans: (b).
Q2. Net barter terms of trade is calculated as: (a) Export price index / import price index x 100 (b) Import price index / export price index x 100 (c) Exports - imports (d) Exports / GDP Ans: (a).
Q3. The theory of comparative advantage was given by: (a) Adam Smith (b) David Ricardo (c) J.M. Keynes (d) Heckscher Ans: (b).