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FACTORS AFFECTING BALANCE OF Trade

Factors that can affect the balance of Trade include;

1. The cost of Production, (land, labour, capital, taxes, incentives, etc) in the exporting as well as the importing Economy.
2. The cost and availability of raw materials, intermediate goods and inputs.
3. Exchange rate movement.
4. Multi lateral, bi-lateral, and unilateral taxes or restrictions on Trade.
5. Non-Tariff barriers such as environmental, Health and safety standards.
6. The availability of adequate foreign exchange with which to pay for imports and prices of goods manufactured at home.

In addition, the Trade balance is likely to differ across the business cycle in export led-growth (such as oil and early industrial goods). The balance of Trade will improve during an Economic expansion.

However, with domestic demand led growth (as in the United States and Australia), the Trade balance will worsen at the same stage of the business cycle.

Since the Mid 1980s, the United States has had a growth Deficit in tradable goods, especially with Asian nations such as China and Japan which now hold large sums of U.S debts. Interestingly, the U.S has a Trade Surplus with Australia due to a favourable Trade advantage which it has over the latter.

Economic POLICY WHICH COULD HELP REALISE Trade SurplusES.

(a) Savings

Economies such as Canada, Japan, and Germany which have savings Surplus Typically runs Trade Surpluses. China, a High Growth Economy has tended to run Trade Surpluses. A higher savings rate generally corresponds to a Trade Surplus. Correspondingly, the United States with a lower Savings rate has tended to run high Trade Deficits, especially with Asian Nations.

(b) Reducing import and increasing Export.

Countries such as the U.S and England are the major proponent of this theory. It is also known as the mercantile theory. A Practice where the government regulates strictly the inflow and outflow from the Economy in terms of import and export. One major advantage of this theory is that it makes a nation self sufficient and has a multiplier effect on the overall development of the nation’s entire sector.

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