Trade Balance – A Viable Indicator of an Economy’s Health

By Advisorymandi
23-June-2018 8:00:10 AM
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Trade Balance – A Viable Indicator of an Economy’s Health

Since the economic conditions of a country always play a vital role in the volatility of the share market, it is obvious to say that any movement in the economy will put an impact on share market and other financial markets. Now, the movement can be both major and minor. So, those who invested in the stock market or any other financial market have to keep a close eye on the major economic events and announcements which can influence the financial market on a big level. There are economic indicators which help these investors and traders to understand the market and economic events which already happened or about to happen. By monitoring such events, one can take an informed decision regarding his/her trade or investment. One such viable indicator is “Trade Balance” which also known as Balance of Trade (BOT).

How does it work?

The balance of trade or trade balance is the difference between the value of a country’s exports and imports in monetary terms for a given time period. It is a measure of the value of country’s exports goods and services against what it imports from other countries.

The indicators within the trade balance report that are most well-known are trade deficit and trade surplus.

Trade Deficit – It is an economic condition where a country imports more goods and services than it exports. That means a country with a large trade deficit borrow money to pay for its goods and services.

Trade Surplus – It is an economic condition where a country exports more goods and services than it imports. That means a country with a large trade surplus lends money to trade deficit countries.

Why the Trade Balance Report matters so much?

There are countries which have been through the trade deficit condition for a very long time, similarly, countries which have been in trade surplus condition for quite long. To best understand this, let’s take real examples –

The United States has had a trade deficit since 1976 conversely, China has recorded trade surplus since 1995. Both are developed countries but have different economic conditions which clear that trade surplus and the deficit is not always a viable indicator of an economy’s health. It is because, in case of recession, a country would prefer to export more goods and services to create more jobs and demand in the country however in times of economic expansion, a country would prefer to import more goods and services to promote price completion.

Advantages & Disadvantages

Trade Balance Report or Balance of Trade (BOT) is a large component of GDP and shows which countries make up the largest percentages of the balance. The trade balance data come on a monthly basis and can be accessed by a live economic calendar.

However, there are few disadvantages of the trade balance, one of them is its inconclusive to the long-term effects on the stock market and another is, volatility nature due to oil prices.

Final Thoughts: –

In a nutshell, we can say that trade balance is a viable economic indicator when it comes to finding out the nature of the economic condition, however, it is not the idle indicator to monitor the economic health.

If you have any query or would like to add something then don’t forget to mention in the comment section below.

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Author: Advisorymandi

AdvisoryMandi is India's most trusted Stock Market Advisory marketplace covers NSE, BSE, MCX & NCDEX. Invest with confidence and harness the power of AdvisoryMandi to make smarter investment decisions in Stocks, Indices, Commodities, Forex & IPO.

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