Trade Imbalance or Trade Deficit: Meaning, Differences, and Impact

Key Takeaways:
 

• A trade imbalance in economics happens when a country’s imports and exports are unequal. 
   
• When the import rates are higher than the export rates, we refer to it as a negative balance of trade. Similarly, the term positive balance of trade is used when exports are higher than imports.
   
• The trade imbalance causes can directly affect the economic strength and weakness of the country.

You know how every country is somehow connected to the others for different reasons. Some are connected through tourism, some through jobs, but the main reason for that connection is trade. However, this exchange of products and services is rarely equal. 

This imbalance can be caused by the unplanned activities while trading. Meaning, one country buys more than they sell, while the other does exactly the opposite. 

This imbalance is not always a bad thing, but surely, it does reflect something important. It tells how a country’s economy, strength, dependency, imports, and global relationships work. 

I know it feels more complicated while you read it, but it is very simple to understand. Let’s see if a trade imbalance causes harm to the country’s economy.

What is Trade Imbalance in Economics? 

A trade imbalance happens when a country’s imports and exports are unequal, leading to a trade deficit or a surplus. Here, a trade deficit means more importing than exporting, and a surplus means more exporting than importing. 

In simple words, trade imbalance means there is a difference between the imports and exports of a country. A simpler explanation:

Whether big or small, this difference plays a big role in the economy of a country. It can both negatively and positively impact a country’s trade system. One of the biggest examples of this is India Russia trade imbalance. Here, India imports oil from Russia, but exports to Russia are comparatively low, creating a trade deficit. 

How to calculate Balance of Trade?

The actual calculation of the trade balance is quite simple. Basically, it is the difference between what a country sells to others and what they buy from them. 

Let's understand this with an example: 

BOT = Exports - Imports 

Here:

• Exports = Total value of goods and services exported 
• Imports = Total value of goods and services imported 

Below is an example of using this formula in an actual calculation: 

1. Exports = ₹8,00,00,000
2. Imports = ₹6,50,00,000
3. Balance of Trade = ₹1,50,00,000

BOT = Exports - Imports 

BOT = ₹8,00,00,000 - ₹6,50,00,000

BOT = ₹1,50,00,000

The calculation shows a positive value, which means there is a trade surplus. We calculate trade imbalance by country currency. This evaluation shows how much they are spending on imports and earning from exports. 

Bonus Tips: India’s trade in February narrowed to $27.1 billion from $34.68 billion in January. The Hormuz crisis has affected the energy supply countrywide. This deficit is due to a notable rise in the import value of gold and silver. 

Negative vs Positive Balance of Trade

The difference that a negative balance of trade and a positive balance of trade is how much a country is earning or spending through global trade. We have provided complete information regarding the deficit and surplus for you to understand it better: