Understanding Trade Flows and Trade Balance.

International trade can be broadly distinguished between trade in goods (merchandise) and services.

The bulk of international trade concerns physical goods, while services account for a much lower share.

World trade in goods has increased dramatically over the last decade, rising from about $10 trillion in 2005 to more than $18.89 trillion in 2019.

We’re living in a global marketplace.

Countries sell their goods to countries that want them (exporting), while at the same time buying goods they want from other countries (importing).

Trade Flows

Have a look around your house.

Most of the stuff (electronics, clothing, doggie toys) lying around is probably made outside of the country you live in.

If you live in the United States, look at all the different countries that the U.S. trades with.

Every time you buy something, you have to give up some of your hard-earned cash.

Whoever you buy your widget from has to do the same thing.

U.S. importers exchange money with Chinese exporters when they buy goods.

And Chinese imports exchange money with European exporters when they buy goods.

The exchange of money, which changes the flow of currency into and out of a country accompanies all this.

Ratio of Exports to Imports

Trade balance (or balance of trade or net exports) measures the ratio of exports to imports for a given economy.

It demonstrates the demand for that country’s goods and services, and ultimately its currency as well.

If exports are higher than imports, a trade surplus exists, and the trade balance is positive.

If imports are higher than exports, a trade deficit exists, and the trade balance is negative.

So:

Exports > Imports = Trade Surplus = Positive (+) Trade Balance

Imports > Exports = Trade Deficit = Negative (-) Trade Balance

Trade deficits have the prospect of pushing a currency price down compared to other currencies.

Net importers first have to sell their currency in order to buy the currency of the foreign merchant who’s selling the goods they want.

When there’s a trade deficit, the local currency is being sold to buy foreign goods.

Because of that, the currency of a country with a trade deficit is less in demand compared to the currency of a country with a trade surplus.

Net exporters, countries that export more than they import, see their currency being bought more by countries interested in buying the exported goods.

Trade surpluses tend to experience currency appreciation.

It is in more demand, helping their currency to gain value.

It’s all due to the DEMAND for the currency.

That’s because when exporters convert the foreign currencies they earn abroad into their domestic currency, this tends to put upward pressure on the domestic currency.

Currencies in higher demand tend to be valued higher than those in less demand.

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