Balance of Trade

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Even though the United States has many natural resources and the ways and means to use them in manufacturing, it cannot provide its people with all that they want or need. For this reason, the United States participates in international trade, which is the exchange of goods and services with other nations. Without international trade, goods would either cost more or not be available.

Throughout the world, there are substantial differences in the natural resources available. For example, Canada, with its huge forests, is a major producer of lumber and paper products; the Middle East has rich oil reserves; and the coastal regions of the world are leaders in the fishing industry.

Without international trade, each country would have to be totally self-sufficient. Each would have to make do only with what it could produce on its own. This would be the same as an individual being totally self-sufficient, providing all goods and services, such as clothing and food, that would fulfill all wants and needs. International trade allows each nation to specialize in the production of those goods it can produce most efficiently. Specialization, in turn, causes total production to be greater than it would be if each nation tried to be self-sufficient.

Goods and services sold to other countries are called exports; goods and services bought from other countries are called imports. The U.S. Bureau of the Census, Foreign Trade Division, indicates that U.S. exports include such goods as corn, wheat, soybeans, plastics, iron and steel products, chemicals, and machinery, while imports include such goods as chemicals, crude oil, machinery, diamonds, and coffee.

The balance of trade is the difference between the dollar amount of exports and the dollar amount of imports. The United States has many trade partners. Table 1 shows the U.S. balance of trade with three selected nations.

In order to have a trade surplus, a country must export (sell) more than it imports (buys). The opposite of a trade surplus is a trade deficit. This occurs when a country imports (buys) more than it exports (sells). As can be seen from Table 1, a country can have a trade surplus with one country and a trade deficit with another. The Bureau of the Census records indicate that for the month of November 1998 the United States had a trade surplus with such countries as Saudi Arabia, the Netherlands, Australia, and Brazil. During the same month, the United States had a

United States Trade with Selected Countries, 1998

Country	Goods Exported (In Millions)	minus	Good Imported (In Millions)	equals	Balance of Trade
(exports - imports = balance of trade)
Japan	58	-	122	=	-64
Canada	154	-	175	=	-21
Australia	12	-	5	=	+7

trade deficit with such countries as Japan, China, Canada, and Mexico.

The Bureau of the Census also reports that the United States experienced its first trade deficit (total of all exports minus total of all imports) of the twentieth century in 1971, with a trade deficit of approximately $1.5 billion. A record high trade deficit occurred in 1998, when imports exceeded exports by approximately $230 billion. Table 2 shows the U.S. balance of trade for the years 1960 through 1998. As can be easily seen in the table, the U.S. trade deficit continues to increase.

As stated earlier, total production increases when a nation specializes in the production of those goods it can produce most efficiently instead of attempting to be totally self-sufficient. Allen Smith (1986), states that "a country that can produce a product more efficiently than another country is said to have an absolute advantage in the production of that product" (p. 315). When a nation can use fewer resources to produce the same amount of a product, it has an absolute advantage in the production of that product. For example, Brazil has an absolute advantage over the United States in the production of coffee, and the Middle East has an absolute advantage over the United States in the production of crude oil. Because of its ideal climate, Ecuador can produce bananas more efficiently than the United States; therefore, Ecuador has an absolute advantage over the United States in the production of bananas. However, the United States has an absolute advantage over Ecuador in the production of most products. Both nations benefit by trading those products that each nation can produce more efficiently. Nations usually will not trade with other nations unless there are gains to be made by each nation. However, the gains made will not necessarily be equal.

Smith (1986) also states that "any time a nation has an absolute advantage in the production of two goods or services, the nation has a comparative advantage in the production of that good or service where the absolute advantage is greater" (p. 315). In other words, if a nation has a two-to-one absolute advantage in the production of one product and a three-to-one absolute advantage in the production of another product, the comparative advantage lies with the product with the larger ratio. Smith (1986) also states that "even though a nation has an absolute disadvantage in the production of two products, it has a comparative advantage in the production of that product in which the absolute disadvantage is less" (p. 316). For example, even though a nation has a disadvantage in the production of a certain product, if that disadvantage is small compared to its disadvantage in the production of other products, it still has a comparative advantage with the former product.

When the United States buys goods from another country, it usually pays for the goods in the currency of the exporting country. There are many transactions that involve the exchange of money between nations. The balance of payments is an accounting record of the difference

Trade Balance
Goods on a Census Basis
VALUE IN MILLIONS OF DOLLARS
1960 THRU 1998

Year	Balance	Total Exports	Total Imports
1960	4,609	19,626	15,018
1961	5,476	20,190	14,714
1962	4,583	20,973	16,390
1963	5,289	22,427	17,138
1964	7,006	25,690	18,684
1965	5,333	26,699	21,366
1966	3,830	29,372	25,542
1967	4,122	30,934	26,812
1968	837	34,063	33,226
1969	1,290	37,332	36,042
1970	3,225	43,176	39,951
1971	-1,476	44,087	45,563
1972	-5,729	49,854	55,583
1973	2,389	71,865	69,476
1974	-3,884	99,437	103,321
1975	9,551	108,856	99,305
1976	-7,820	116,794	124,614
1977	-28,353	123,182	151,534
1978	-30,205	145,847	176,052
1979	-23,922	186,363	210,285
1980	-19,696	225,566	245,262
1981	-22,267	238,715	260,982
1982	-27,510	216,442	243,952
1983	-52,409	205,639	258,048
1984	-106,702	223,976	330,678
1985	-117,711	218,815	336,526
1986	-138,280	227,159	365,438
1987	-152,119	254,122	406,241
1988	-118,526	322,426	440,952
1989	-109,400	363,812	473,211
1990	-101,719	393,592	495,311
1991	-66,723	421,730	488,453
1992	-84,501	448,164	532,665
1993	-115,568	465,091	580,659
1994	-150,630	512,626	663,256
1995	-158,801	584,742	743,543
1996	-170,214	625,075	795,289
1997	-181,488	689,182	870,671
1998	-230,852	682,977	913,828

between the amount of money that a country receives and the amount of money that it pays out during a year. A positive balance of payments means that a country receives more money in a year than it pays out. Likewise, a negative balance of payments occurs when a country pays out more money than it takes in. Any transaction that involves payments between countries is included in the balance of payments. The largest component of the balance of payments is the balance of trade, but many more financial transactions are included, such as foreign aid to other nations, government support of military personnel stationed in other nations, and money spent by tourists.

The importing and exporting of goods and services are controlled by the U.S. government. Three of the most common barriers to trade are tariffs, import quotas, and embargoes. A tariff is a tax imposed by the government on imported goods. An import quota places a limit on the amount of a product that may be imported or exported during a given period of time. An embargo occurs when the government halts the import or export of a certain product.

Gottheil, Fred M., and Wishart, David. (1997). Principles of Economics with Study Guide. Cincinnati: South-Western College Publishing.

Smith, Allen W. (1986). Understanding Economics. New York: Random House.

U.S. Bureau of the Census, Foreign Trade Division. http://www.census.gov/foreign-trade/sit e1/1998.

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