The balance of trade for import and exports
The balance of trade is the difference in value between the total exports and total imports of a country during a specific period of time.
A trade deficit is when the value of imports exceeds the value of exports. A trade deficit will usually lead to a weakening of a country’s currency which makes exports more attractively priced and therefore moves imports and exports back into balance.
The opposite situation, when the value of imports is less than the value of exports, is known as a trade surplus. A trade surplus would normally be expected to lead to a strengthening of a country’s currency.
Example: implications of changes in demand for currency
A buyer from Australia orders 100 packing boxes from the UK. The cost to the buyer is AUD200.
Over the next 12 months general demand for UK goods and services from overseas falls and this results in the value of GBP falling. The Australian buyer orders another 100 packing boxes from the UK, but it only costs them AUD180.
Other Australian buyers recognise it is cheaper to buy goods from the UK due to the exchange rate. This leads to increased demand for GBP which increases the value (strengthens GBP).
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