What is a Favorable Balance of Trade?

Definition: Favorable balance of trade is a positive situation where a country exports more goods and services than what it imports. It is an economic term that refers to the existence of a surplus in the nation’s balance of trade.

What Does Favorable Balance of Trade Mean?

The Balance of Trade is an economic measure calculated by subtracting the total amount of imported items to the total amount of those exported. This balance explains how the country is positioned in terms of commercial relationships with other nations. If the balance is positive, it means the county exports more than what it imports and if it is a negative one, is the other way around. A favorable balance of trade is, nevertheless, not always a positive thing.

Depending on the country economic dynamics and foreign trade policies a favorable balance created through protectionism is not always a good thing since it might reduce the country’s standard of living because of scarcity and high prices, due to a lack of competition. On the other hand, a large unfavorable balance can diminish the country’s financial stability because of a deterioration of its foreign currency reserves.

Example

Let’s say Argentina is a mainly a meat producer and that item accounts for more than 50% of the country’s exports. The country is currently receiving imported meat from other places and this has created discomfort among the domestic industry players. The government, acting under the pressure of lobby groups, decided to issue protectionist measures to reduce the amount of imported meat coming into the country.

This in turn, increased domestic consumption, since imported meat accounted for 20% of domestic consumption and it therefore reduced the meat producer’s ability to export substantially. What was historically a favorable balance of trade (for the meat production industry) came to be an unfavorable balance, causing negative effects for the country’s finances.