Convergent or divergent dynamics of imports and exports are the first causes of trade balance changes.
Everything that impact asymmetrically on imports and exports can impact the trade balance. In particular price and non-price competitiveness is relevant. If external pressure forces down the prices at which a country sells its exports, than a trade deficit is more likely ("terms of trade" effect). In other words, in a hierarchical world, trade balance can reflect political balance of power.
A faster GDP growth than trade partners' ones usually results in trade deficit, since imports are elastic to GDP (they rise more than proportionally).
Currency exchange rate can be very important - possibly due to a fixed exchange rate and a higher inflation rate than commercial partners, an overvaluation of the domestic currency can lead to deep trade deficits on most products and with most countries. A sharp devaluation can dramatically improve all these relationships.
If financial transaction are particularly intensive and autonomous, an inflow of FDI can lead to higher imports (of production inputs for the new foreign-owned plants), also because of revaluation of currency. Hopefully, this short-run effect will be balanced by more exports in the future. In this cases, trade balance is adjusting to financial movements.
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Sunday, March 28, 2010
Imports and Exports
Net trade with foreigners: exports less imports. A trade deficit means that exports are insufficient to pay for exports; a trade surplus, the opposite.
Sometimes called "net exports", the trade balance is a component of GDP, to the effect that a perfectly equilibrated trade balance makes the GDP dependent only on domestic values (consumption, public expenditure, investments).
A simultaneous increase of both imports and exports by the same amount leaves unaltered the trade balance. Any difference in dynamics between exports and imports has a multiplied effect on trade balance.
Composition - Trade balance is usually decomposed by product and by country (bilateral trade balances). Relevant is the degree of concentration of the imbalance in trade caused by one or few commodities. If concentration is high, a targeted industrial policy could improve the balance (e.g. reduce the imbalance).
On the other hand, if a deficit is due only to few partners, proactive and consensus-based trade negotiations with them could fairly quickly set the problem.
Although less general than trade balance, which includes both goods and services, the "merchandise balance", which includes only goods and not services, is sometime used because of better data availability.
Sometimes called "net exports", the trade balance is a component of GDP, to the effect that a perfectly equilibrated trade balance makes the GDP dependent only on domestic values (consumption, public expenditure, investments).
A simultaneous increase of both imports and exports by the same amount leaves unaltered the trade balance. Any difference in dynamics between exports and imports has a multiplied effect on trade balance.
Composition - Trade balance is usually decomposed by product and by country (bilateral trade balances). Relevant is the degree of concentration of the imbalance in trade caused by one or few commodities. If concentration is high, a targeted industrial policy could improve the balance (e.g. reduce the imbalance).
On the other hand, if a deficit is due only to few partners, proactive and consensus-based trade negotiations with them could fairly quickly set the problem.
Although less general than trade balance, which includes both goods and services, the "merchandise balance", which includes only goods and not services, is sometime used because of better data availability.
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