Trade is one part of an economy's transactions with the rest of the world.
A trade balance compares export and import values; check whether the source covers goods only or goods and services. The current account is wider, including trade and primary and secondary income. The capital account covers capital transfers and non-produced non-financial assets; the financial account records transactions in financial assets and liabilities. A more favourable trade balance is a macroeconomic objective, but its cause matters for living standards.
- Trade balance
- Exports are goods and services sold abroad; imports are bought from abroad. A trade surplus means export value exceeds import value; a deficit means the reverse. Check whether the source counts goods only or goods and services.
- The wider accounts
- The balance of payments records transactions between residents and the rest of the world. Trade belongs to its current account. Purchases of shares and loans belong to the financial account, not the capital account.
- Watch for this
- A larger surplus may result from people and firms buying fewer imports because their incomes have fallen. Its cause matters for living standards.
Keep the accounts distinct
Current account
Alongside trade, the current account includes primary income from work and ownership, such as wages and interest, and secondary income: current transfers without something supplied in return, such as money sent to family abroad.
Capital account
Capital transfers change assets or debts: for example, a government agrees to cancel part of the debt owed by another country's government. The account also records non-produced non-financial assets, including certain transferable licences that can themselves be sold as assets. It is not the account for every financial investment.
Financial account
The financial account records cross-border transactions in financial assets and liabilities. Buying shares acquires an ownership claim; making a loan creates a claim for the lender and a debt for the borrower. Neither is a purchase of a good or service.
Interpret the cause
A trade deficit may accompany productive capital-equipment imports; a surplus may accompany depressed domestic spending. Neither sign alone settles the welfare judgement. No balance-of-payments sign conventions or account calculations are required.
Worked example: A surplus caused by weak spending
A goods-and-services trade series reports a larger surplus because imports fall sharply as domestic incomes contract; exports are unchanged.
- The arithmetic trade position improves because import spending falls relative to exports.
- The fall may reflect weaker household consumption and business investment, rather than greater export competitiveness.
- Judge the improvement alongside real income, employment and the purpose of imports; a larger surplus is not automatically a welfare gain.
Watch out for this
A trade surplus and the entire balance of payments are the same thing.
Trade is part of the current account, which is itself one part of the wider external accounts.
Check your understanding
Which transaction belongs to the financial account rather than trade in goods and services?
- A non-resident buys shares in a domestic company.
- A local hotel sells accommodation to an overseas visitor.
- A domestic shop imports furniture for sale.