Nations and businesses that trade back and forth, buy and sell companies, loan one another money, and invest in real estate around the globe need to have a way to evaluate the impact of these transactions on the economy. They need to make decisions about trade policies, regulations, and trade agreements, and until they can get a snapshot of what global trade is doing to hurt or help its economy, they can’t make these decisions.

It’s a lot like your own finances, just on a much larger scale. At the end of the month, have you spent more than you earned? Do you have a large positive balance in your bank account as a result of receiving a financial aid check? Did you need to borrow money from your parents to buy books or clothes? Until you really examine where your money is coming from and balance your checkbook, it’s hard to make long-term financial plans—like, say, deciding whether or not to buy a new car or purchase a home.

This is very similar to what countries do when they measure the impact of trade on their economy. In this section, we’ll look at two key measurements of trade: balance of trade and balance of payments.

Balance of Trade

One of the ways that a country measures global trade is by calculating its balance of trade.

Balance of trade is the difference between the value of a country’s imports and its exports, as follows:

value of exports – value of imports = balance of trade

The calculation of the balance of trade yields one of two outcomes: a trade deficit or a trade surplus. A trade deficit occurs when a nation imports more than it exports. Since 1976, the United States has consistently run trade deficits due to high imports of oil and consumer products. In recent years, the biggest trade deficits were recorded with China, Japan, Germany, and Mexico. This shouldn’t come as a surprise to you if you emptied your backpack and counted up all the items not made in the United States. In contrast, a trade surplus occurs when a nation exports more than it imports. Although the United States has run an overall trade deficit since 1976, it doesn’t mean that we import more from every country than we export. On the contrary, the United States records trade surpluses with Hong Kong, the Netherlands, the United Arab Emirates, and Australia.

Because the balance of trade is calculated using all imports and exports, it’s possible for the United States to run a surplus with some nations and a deficit with others. As with your checkbook, the balance reflects the difference between total exports (sales, which result in a deposit in your account or “deposits”) and total imports (purchases, which result in a withdrawal from your account or “withdrawals”). When a nation exports, other nations pay it for goods or services, so it gets to take their money and make a deposit. When a nation imports, it pays other nations for their goods and services, and they would need to make a withdrawal to pay for them.

Balance of Payments

Balance of Payments is the difference between the total flow of money coming into a country and the total flow of money going out of a country during a period of time. Although related to the balance of trade, balance of payments is the record of all economic transactions between individuals, firms, and the government and the rest of the world in a particular period. Thus the balance of payments includes all external transactions of a country, including payments for the country’s exports and imports of goods, services, foreign investments, loans and foreign aid, financial capital, and financial transfers.

For instance, if a U.S. company buys land or a factory in another country, that investment is included in the U.S. balance of payments as an outflow. Likewise, if a U.S. company is sold to a foreign company, it’s included in the balance of payments. Just recently, Didi Chuxing, the Chinese ride-hailing service, bought Uber’s subsidiary in China in a deal valued at $35 billion. This sale will create a cash inflow to the United States, but over the long term, it will decrease the revenue flowing in from China through Uber.

If a nation receives foreign aid or borrows money from another country, this amount is also reflected in its balance of payments as a cash inflow. For example, the bailout Greece received from the Eurozone and IMF in 2010 to help stabilize its failing economy affected the balance of payments for all of the nations involved. Greece recorded the €110 billion loan as an inflow in its balance of payments, while the Eurozone members recorded it as an outflow in their balance of payments.

A country’s balance of payments is calculated as follows:

 total money coming into a country (inflow) − total money going out (outflow) = balance of payments

At this point, it’s tempting to make judgments about these different types of trade measurements and conclude that trade surpluses and favorable balance of payments are always indicators of a strong economy, but unfortunately it’s not so cut and dry. Balance of trade and balance of payments are starting points—much in the way that an individual’s credit rating might be a starting point for seeking a loan. How the numbers are interpreted and viewed by the country’s leaders, other countries, and the world depends on many factors, such as where a country is in its economic development, the factors contributing to the balance of trade or payments, the health of the overall global economy, what the country is doing with its imports, and so on. As you might guess, assessments of these factors can be intensely political. You’ll learn more about these considerations later in this module when we discuss how nations attempt to restrict or control trade.