Balance Of Trade

Balance Of Trade

Balance of Trade, the current account section of the balance of payments, measured by the difference between a country's receipts for visible and invisible exports and its payments for visible and invisible imports.

When exports exceed imports the difference is described as a balance of trade surplus or 'active' balance; when imports exceed exports the difference is a deficit or 'passive' balance. These terms do not necessarily imply approval or disapproval, for without further information it cannot be said whether a surplus or a deficit is good or bad. An under-developed country borrowing heavily from inter-national institutions and foreign countries will run a current account deficit for a long time, as it uses the loans to pay for imports of capital goods that will assist its development and eventually enable it to replace some imports by home-produced substitutes. A country receiving reparations payments must run a current account deficit, otherwise it may prevent the paying country from earning enough foreign currency or gold to make the payments. But if a country cannot expect an inflow of capital to pay for its excesses of imports over exports of goods and services, or if (like Britain) it wishes to be on balance a lender to the rest of the world, a continuing deficit may be serious. One likely cause is too high a level of monetary demand at home, so that the pressure of demand for goods and services diverts them from export markets to the home market and stimulates imports. This situation, together with the obligation or wish to lend capital to the rest of the sterling area and to under-developed countries, appears to have been the main cause of Britain's difficulties in external payments since the end of the Second World War. If the obligation to lend to overseas territories is unavoidable, the remedy would appear to be the reduction of internal demand by (a) credit restriction, (b) cuts in Government expenditure, (c) increases in taxation, or combinations of these measures. Since they may lead to some .unemployment and check investment in industry, the Government is in difficulty because the solution of the external problem creates unwelcome problems in the internal economy. It is largely as a result of this dilemma that the British economy has been subject to the much criticized 'stop-go' policy of imposing restrictions on demand when a balance of payments crisis appears, and easing them when wagesunemployment figures rise and perhaps before the external difficulties have been removed, so that another crisis soon recurs.

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