{"id":596,"date":"2015-04-22T19:31:48","date_gmt":"2015-04-22T19:31:48","guid":{"rendered":"https:\/\/courses.candelalearning.com\/masterybusiness1xngcxmaster\/?post_type=chapter&p=596"},"modified":"2019-01-05T01:41:25","modified_gmt":"2019-01-05T01:41:25","slug":"reading-the-globalization-of-business","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wmintrobusiness\/chapter\/reading-the-globalization-of-business\/","title":{"raw":"Reading: Balance of Trade and Balance of Payments","rendered":"Reading: Balance of Trade and Balance of Payments"},"content":{"raw":"\"A<\/a>\r\n

Two Key Measurements: Balance of Trade and Balance of Payments<\/h2>\r\nNations and businesses that trade back and forth, buy and sell companies, loan\u00a0one\u00a0another 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\u00a0like 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\u00a0long-term financial plans\u2014like, say, deciding whether or not to buy a new car or purchase a home. This is very similar to what countries do when they\u00a0measure the impact of trade on their economy.\r\n\r\nIn this section we'll look at two key measurements of trade: balance of trade and balance of payments.\r\n

Balance of Trade<\/h3>\r\nOne of the ways that a country\u00a0measures global trade is by calculating its balance of trade. Balance of trade <\/strong>is the difference between the value of a country\u2019s imports and its exports, as follows:\r\n

value of exports \u2013 value of imports = balance of trade<\/strong><\/p>\r\nNOTE: It's important to use this formula just as it's presented, without altering the sequence of values.\r\n\r\nThe calculation of the balance of trade yields\u00a0one of two outcomes: a trade deficit or a trade surplus. A trade deficit\u00a0<\/strong>occurs when a nation imports\u00a0more than it exports. Since 1976, the United States has consistently run trade deficits due to\u00a0high 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<\/em> made in the USA. In contrast, a trade surplus<\/strong>\u00a0occurs when a nation exports more than it imports. Although the U.S. has run an overall trade deficit since 1976, it doesn't mean that we import more from every<\/em> country than we export. On the contrary, the\u00a0United States records trade surpluses with Hong Kong, the Netherlands, the United Arab Emirates, and Australia. Because the balance of trade is calculated using\u00a0ALL imports and exports, it's possible for the U.S. to run a surplus with some nations and a deficit with others. As with your checkbook, the balance reflects the difference\u00a0between total<\/em> exports (\"deposits\") and total<\/em> imports (\"withdrawals\").\r\n\r\nLet\u2019s look at the balance of trade for \"Candyland.\"\r\n\r\n\"Photo<\/a>\r\n\r\nCandyland is located in a region that lacks phosphate as\u00a0a natural resource. However, it\u00a0does have an abundance of sugarcane. As a result of its comparative advantages, Candyland imports phosphate from Christmas Island (it's a real place in Australia\u2014look it up!) to fertilize the sugarcane it grows, and it uses the sugarcane to manufacture saltwater taffy, which it exports to Christmas Island. The following table shows Candyland's\u00a0imports and exports with Christmas Island in 2014.\r\n

\r\n\r\n\r\n\r\n\r\n\r\n
\u00a0<\/strong><\/td>\r\nImports (phosphate)<\/strong><\/td>\r\nExports (taffy)<\/strong><\/td>\r\n<\/tr>\r\n<\/thead>\r\n
2014<\/strong><\/td>\r\n$45,000,000<\/td>\r\n$75,000,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nUsing these figures, we can easily calculate Candyland's balance of trade in 2014: $75,000,000 (exports) - $45,000,000 (imports) = $30,000,000. This means that\u00a0Candyland had\u00a0a trade surplus of $30,000,00\u00a0with Christmas Island, since exports exceeded imports. We can also say that Candyland was a \"net exporter,\" meaning they exported more than they imported.\r\n\r\nHowever, the picture\u00a0changed in\u00a02015 when the Australian government closed the phosphate mine on Christmas Island. Candyland had to import\u00a0phosphate from Morocco, instead, and was not able to get the same favorable pricing as before. Consequently, sugarcane farmers paid more for fertilizer, the price of sugarcane went up, and Candyland had to raise the price on its saltwater taffy. Sadly,\u00a0the people of Morocco aren't\u00a0really big fans of saltwater taffy, so exports fell. The following table shows Candyland's imports and exports with\u00a0Morocco in 2015.\r\n
\r\n\r\n\r\n\r\n\r\n\r\n
\u00a0<\/strong><\/td>\r\nImports (phosphates)<\/strong><\/td>\r\nExports (taffy)<\/strong><\/td>\r\n<\/tr>\r\n<\/thead>\r\n
2015<\/strong><\/td>\r\n$65,000,000<\/td>\r\n$55,000,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nWe can use the figures to calculate Candyland's\u00a0balance of trade: $55,000,000 (exports) - $65,000,000 (imports) = -$10,000,000. The negative number indicates a\u00a0trade deficit of $10,000, showing that Candyland's\u00a0imported more from Morocco than it exported. We would say that\u00a0Candyland became a\u00a0\"net importer\"\u2014importing more than it was exporting.\r\n\r\nObviously this is a simple example. A country's global business doesn't amount to just trading phosphate and taffy or cell phones and blue jeans. It includes all kinds of financial transactions: goods and services imported and exported, foreign investments, loans, transfers, and so on. Tracking all these payments provides another way to measure the size of a country's international trade: the balance of payments.\r\n

Balance of Payments<\/h3>\r\nBalance of Payments<\/strong> 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\u00a0a period of time.\u00a0Although\u00a0related to the balance of trade, balance of payments is the record of all<\/strong>\u00a0economic\u00a0transactions between individuals, firms, and the government and the rest of the world in a particular period. \u00a0Thus the balance of payments includes all<\/strong> external transactions of a country, including\u00a0payments for the country's exports and imports\u00a0of\u00a0goods,\u00a0services,\u00a0foreign investments, loans and foreign aid, financial capital, and\u00a0financial transfers.\r\n