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BALANCE OF TRADE

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Originally appearing in Volume V03, Page 237 of the 1911 Encyclopedia Britannica.
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BALANCE OF See also:TRADE , a See also:term in See also:economics belonging originally to the See also:period when the " See also:mercantile theory" prevailed, but still in use, though not quite perhaps in the same way as at its origin. The " balance of trade " was then identified with the sum of the See also:precious metals which a See also:country received in the course of its. trading with other countries or with particular countries. There was no doubt an See also:idea that somehow or other the amount of the precious metals received represented profit on the trading, and each country desired as much profit as possible. Princes and sovereigns, however, with See also:political aims in view, were not Emerich de See also:Vattel, Le See also:Droit See also:des gens (See also:Leiden, 1758),See also:close students of mercantile profits, and would probably have urged the acquisition of the precious metals as an See also:object of trade even if they had realized that the country as a whole was ex-porting " See also:money's See also:worth " in See also:order to buy the precious metals which were desired for political See also:objects. The " mercantile theory " was exploded by See also:Adam See also:Smith's demonstration that See also:gold and See also:silver were only commodities like others with no See also:special virtue in them, and that they would come into a country when there was a demand for them, according to the amount, in See also:pro-portion to other demands, which the country could afford to pay; but the ideas in which the theory itself has originated have not died out, and the idea especially of a balance of trade" to which the rulers of a country should give See also:attention is to be found in popular discussions of business topics and in. politics, the See also:general notion being that a nation is prosperous when its See also:statistics show a " trade balance "-•in its favour and unprosperous when the See also:reverse is shown. In See also:modern times the excess of imports over exports or of exports over imports, shown in the statistics of See also:foreign trade, has also come to be identified in popular speech with the " balance of trade," and many minds are no doubt imbued with the ideas (1) that an excess of imports over exports is had, and (2) an excess of exports over imports is the reverse, because the former indicates, an " unfavourable " and the latter a " favourable" trade balance. In the former See also:case it is urged that a nation so circumstanced is living on its See also:capital. Exact remedies are not suggested, although the idea of preventing or hampering foreign imports as a means of developing See also:home trade and of thus altering the supposed disastrous trade balance is obviously the logical inference from the arguments. A See also:consideration of these ideas and of See also:recent discussions about imports and exports, appears accordingly to be needed, although the " mercantile theory " is itself exploded. The phrase " balance of trade," then, appears to be an application of a trader's See also:language in his own business to the larger affairs of nations or rather of the aggregate of individuals in a nation engaged in foreign trade. A trader in his own books sets his sales against his purchases, and the amount by which the former exceed the latter is his trade balance or profit. What is true of the individual, it is assumed, must be true of a nation or of the aggregate of individual traders in a nation engaged in the foreign trade.

If their collective sales amount to more than their collective purchases the trade balance will be in their favour, and they will have money to receive. Contrariwise, if their purchases amount to more than their sales, they will have to pay money, and they will presumably be living on their capital. The See also:

argument fails, however, in many ways. Even as regards the experience of the individual trader, it is to be observed that he may or may not receive his profit, if any, in money., As a See also:rule he does not do so. As the profit accrues he may invest it either by employing labour to add to his machinery or warehouses, or by increasing; his stock-in-trade, or by adding to his See also:book debts, or by a See also:purchase of See also:stocks or shares outside his See also:regular business. At the end of a given period he may or may not have an increased See also:cash balance to show as the result of his profitable trading. Even if he has an increased cash balance, according to the modern See also:system of business, this might be a balance at his bankers', and they in turn may have invested the amount so that there is no stock of the precious metals, of " hard money," anywhere to represent it. And the argument fails still further when applied to the transactions between nations, or rather, to use the phrase already employed, between the aggregate of individuals in nations engaged in the foreign trade. It is quite clear that if a nation, or the individuals of a nation, do make profit in their foreign trading, the amount may be invested as it accrues—in machinery, or warehouses, or stock-in-trade, or book debts, or stocks and shares See also:purchased abroad, so that there may be no corresponding " balance of trade " to bring home. There is no doubt also that what may be is in reality what largely happens. A prosperous foreign trade carried on by any country implies a continuous investment by that country either abroad or at home, and there may or may not be a balance receivable in actual gold and silver. The country which presents the most interesting questions in connexion with the study is the See also:United See also:Kingdom, with its largely preponderating foreign trade: Its See also:annual imports and exports, excluding See also:bullion, exceed 800 millions See also:sterling, and the bullion one See also:year with another is roo millions more.

Its excess of imports, moreover, between the See also:

middle and end of the 19th See also:century gradually See also:rose from a small figure to 18o millions sterling annually, and occasioned the popular discussion referred to respecting an "adverse " balance of trade, and particularly the belief existing in many quarters that the nation is living on its capital. The result has been a new investigation of the subject, so as to bring out and See also:present the credits to which the country is entitled in its trade as a shipowner and See also:commission See also:merchant, and to exhibit at the same See also:time the magnitude of See also:British foreign investments, which cannot be less than 2000 millions sterling and must bring in an enormous annual income. Other countries such as See also:France, See also:Germany, See also:Belgium, See also:Holland, See also:Denmark, See also:Norway and See also:Sweden, are in the same See also:condition, though their foreign trade is not on the same See also:scale, and similar rules apply to the See also:reading of their import and export accounts. The United States is a conspicuous instance of a country which in the first See also:decade of the loth century was still in the position 'of a borrower and had a large excess of exports, though there were signs of a See also:change in the opposite direction. New countries generally, such as See also:Canada, See also:Australia and the See also:South See also:American countries, resemble the United States. Comparisons are made difficult by the want of uniformity in the methods of stating the figures, but that different countries have to be grouped according as they are indebted or creditor countries is undeniable, and no study of the trade statistics is possible without recognition of the underlying economic circumstances. In conclusion it may be useful to repeat the See also:main propositions laid down as to the balance of trade. (r) A " balance of trade " to the individual trader, from whose experience the phrase comes, is not necessarily, as is supposed, a balance received or receivable in the precious metals. It may be invested as it accrues—in machinery, or warehouses, or stock-in-trade, or in book debts, or in stocks and shares or other See also:property outside the trader's business, as well as in cash. (2) What is true of the individual trader is also true of the aggregate of individuals engaged in the foreign trade of a country. Cash is only one of the forms in which they may elect to be paid. (3) The imports and exports recorded in the statistical returns of a country do not correspond with the purchases and sales of individual traders, as the sales especially maybe set off by loans, while the so-called imports may include remittances of See also:interest and of capital repaid.

(4) When capital is repaid the country receiving it need not be living on it, but may be investing it at home. (S) The foreign trading of countries may also comprise many transactions, such as the earning of freights and commissions, which ought to appear in a proper See also:

account showing a balance of trade, as similar transactions appear in an individual trader's account, but which are not treated as imports or exports in the statistical returns of a nation's foreign trade. (6) Import and export returns themselves are not the same as accounts of purchases and sales; the values are only estimates, and must not be relied on literally without study of the actual facts. (q) Import and export returns in different countries are not in all cases taken at the same point, there being important See also:variations, for instance, in this respect imports are valued as at the See also:port where they arrive and exports between the returns of two See also:great countries, the United Kingdom at the port where they are despatched from—a See also:plan which so far and the United States, which are often compared, but are really places them on an equal footing for the purpose df striking a balance of trade. But in the import and export records of the United States a different plan is followed. The imports are no longer valued as at the port of arrival with the See also:freight and other charges included, but as at the port of shipment. The results on the balance of trade See also:drawn out must accordingly be quite different in the two cases. With other countries similar See also:differences arise. To deduce then from records of imports and exports any conclusions as to the excess of imports or exports at different times is a See also:work of enormous statistical difficulty. Excellent illustrations will be found in J. See also:Holt Schooling's British Trade Book (1908). See also:complete " balance of trade.

The illusions which may result then from the confusion of ideas between a balance of trade or profit, and a balance of cash paid or received, and from the See also:

identification of an excess of imports over exports or of exports over imports with the balance of trade itself, though they are not the same things, hardly need description. The believers in such illusions are not entitled to any See also:hearing as economists, however, much they may be accepted in the See also:market-See also:place or among politicians. The "balance of trade " and " the excess of imports over exports " are thus simply pitfalls for the See also:amateur and the unwary. On the statistical See also:side, moreover, there is a See also:good See also:deal more to be urged in order to impress the student with care and attention. The records of imports and exports themselves may vary from the actual facts of See also:international purchases and sales. The actual values of the goods imported and paid for by the nation may vary from the published returns of imports, which are, by the See also:necessity of the case, only estimated values. And so with the exports. The actual purchases and sales may be some-thing very different. A so-called See also:sale may prove abortive through its not being paid for at all, the debtor failing altogether. In any case the purchases of a year may not be paid for by the sales of the year, and the " squaring " of the account may take a See also:long time. Still more the estimates of value may be so taken as not to give even an approximately correct account as far as the records go. Thus in the plan followed in the United Kingdom In another particular the argument also fails.

In the aggregate of individual trading with various countries, there may some, times be purchases and sales as far as the individuals are concerned, but not purchases and sales as between the nations. For example, goods are exported from the United Kingdom, See also:

ammunition and stores and See also:ships, which appear in the British returns as exports, and which have really been sold by individual British' traders to individuals abroad; but these sales are not set off by any purchases on the other' side which come into the international account, as the set-off is a See also:loan by the See also:people of one country to the people or See also:government of another. The same with the export df railway and other material when goods are exported for the purpose of constructing See also:railways or other See also:works abroad. The sales are made by individuals in the United Kingdom to individuals abroad; but there is rio set-off of purchases on the Other side. Mutatis mutandis the same explanation applies to the remittance of goods by one country to another, or by individuals in one country to individuals in another to pay the interest or repay the capital of loans which have been received in former times. These are all cases of the See also:movement of goods irrespective of international sales and purchases, though the movements themselves appear in the international records of imports and exports, and therefore it seems to be assumed, though without any See also:warrant, in the international records of the balance of trade. There is yet another failure in the comparison. The individual trader would include in his sales and purchases services such as See also:repairs performed by him for others, and similar services which others do for himself; but no similar accounts are kept of the corresponding portions of international trade such as the earning of freights and commissions, although in strictness, it is obvious, they belong as much to international trade as the imports and exports themselves, which cannot therefore show a most difficult to compare. (8) The United Kingdom is a conspicuous instance of a country which has a great excess of imports over exports in consequence of its large lending abroad in former times; while its accounts are specially affected by the magnitude of its services as a trading nation carrying passengers and goods all over the See also:world, which do not result, however, in so-called "exports." The United States, on the other See also:hand, is a conspicuous instance of an indebted nation, which has or had until lately few or no sums to its See also:credit in foreign trade except the visible exports. (9) The various countries of the world naturally fall into See also:groups. The nations of western See also:Europe, such as France, Germany, Belgium, Holland, Sweden and Norway, fall into a See also:group with Great See also:Britain as creditor nations, while Canada, See also:Australasia' and the South American countries fall into a group with the United States as undeveloped and indebted countries, So also of other countries, each belongs naturally to one group or another. (1o) The excess of imports or exports may vary indefinitely at different times according as a creditor country is receiving or lending at the time, or according as a debtor country is borrowing or paying off its debts at the time, but the permanent characteristics are always to be considered.

End of Article: BALANCE OF TRADE

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