The balance of trade is also called trade balance. It is generally symbolized as NX. The balance of trade for an economy represents the difference of monetary value of total exports and total imports for a given period of time. The balance of trade is said to constitute the biggest portion of an economy’s balance of payment. In simple terminologies it can be defined as an economy’s total exports less its total imports. For a particular economy exports represents money earned by selling final goods and services to other countries, whereas imports represent the cost of buying final goods and services from other countries.
If money earned through exports is more than the cost spent on imports, we will observe a positive balance of trade and this state is known as trade surplus. In other case if cost spent on imports exceeds the money earned through exports, a negative balance of trade is observed and this situation is termed as trade deficit. Trade deficit is also referred to as trade gap. If required, balance of trade can be classified into two categories namely; balance of trade for final goods and balance of trade for final services. For services the balance of trade is known as invisible balance and for final goods the balance of trade is regarded as visible balance. Trade surplus interprets that the economic health of the economy is stronger than the other economies from which that particular economy buys imports.
Balance of trade also affects the value of currency for a particular economy. In case of trade surplus as we know that it means that the total exports of that country is greater than its imports. In other words we can say that the country with trade surplus is earning more revenues from exports than its expenditures on imports. Therefore it can be concluded that the health of economy with trade surplus is getting stronger relative to other countries from which it buys imports. We also know that healthy economy has positive impact over currency rate. Hence, it is concluded that trade surplus employs positive effect on the currency value. On the contrary side trade deficits explains that expenditures on imports are greater than revenues from exports, therefore it depicts unhealthy economic situation. Unhealthy economy has weak currency value. Therefore, trade deficit tend to depreciate the value of the currency. Economies with balance deficit will automatically be compelled by countries with trade surplus to de value their currency.