Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Trade Surplus

What it is:

When the value of a country's exports exceeds the value of its imports, the resulting positive number is called a trade surplus.

How it works (Example):

Balance of trade (BOT; also called the "trade balance") is a measure of a country's exports minus its imports. BOT is a component of a country's balance of payments (BOP) as is calculated for a particular period (usually a quarter or a year). In the United States, the Bureau of Economic Analysis calculates the BOT.

For example, if the value of exported items to the United States equaled $1 trillion last year, but the value of imported items from the United States equaled $750 billion, then the United States would have a positive $250 billion BOP, or a $250 billion trade surplus.
 

Why it Matters:

Countries have various methods for calculating BOT, but the objective is to help economists and analysts understand the strength of a country's economy in relation to other countries. For example, a country with a large trade deficit is essentially borrowing money to purchase goods and services, but a country with a large trade surplus is essentially doing the opposite. In some cases, the BOT correlates with the country's political stability because it is indicative of the level of foreign investment occurring there.

As mentioned, the BOT is part of the BOP, which is composed of three subaccounts in the United States: the current account, the capital account and the financial account, each of which has its own type of inflows and outflows. The BOT is part of the current account, which is composed of merchandise trade, services, income receipts and one-way transfers such as foreign aid.