Finance: What is Balance of Trade?

Shmoop

15,934 views • 7 years ago

Video Summary

The video explains the concept of balance of trade using a seesaw analogy, where exports represent one side and imports the other. A favorable balance of trade occurs when a country exports more than it imports, leading to increased wealth and influence. Governments may intervene to influence this balance, for example, by imposing taxes on imported goods to protect domestic industries, though this doesn't always guarantee success, as illustrated by the US auto industry's experience with Japanese and Korean imports. One interesting fact is that governments can use taxes on imports to try and tip the balance of trade in their favor.

Short Highlights

Balance of trade compares a country's exports (goods sold) to its imports (goods bought).
A favorable balance of trade means exporting more than importing, leading to more wealth and influence.
Governments can intervene by imposing taxes on imports to support domestic industries.
This intervention, like taxes on foreign cars, doesn't always guarantee a win for domestic markets.
The seesaw of trade can be influenced by government actions, but isn't always fair.

Key Details

Balance of Trade Analogy [00:10]

The balance of trade is conceptualized as a seesaw, with exports on one side and imports on the other.
A country wants to be "heavy" on the seesaw by exporting significantly more than it imports.
This scenario allows a country to collect more of other nations' currency, oil, or other valuable commodities.

think of balance of trade the same way you would think of that seesaw in your schoolyard

Economic Influence and Government Intervention [01:08]

A powerful, imbalanced trade position can grant a country more influence on the global stage.
Politicians and governments become concerned when the balance of trade is not in their favor.
Governments can actively influence the balance by imposing taxes on imported goods.

and if you're on the seesaw you want to be heavy like fat with feet firmly planted on the ground where you are exporting or selling to another country a whole lot more stuff than you're importing

Impact of Tariffs on Trade [01:37]

An example provided is the US government imposing a tax on imported cars from Japan, Korea, and Germany to address the loss of dominion over the auto industry.
Despite this tax, the US ultimately did not regain its dominant position in the auto industry in this instance.
This illustrates that the balance of trade is not always a fair or easily manipulated system.

they smack a tax on goods they import from you like the US government in the middle of our loss of dominion over the auto industry to Japan and Korea and Germany well we placed a big fat tax on foreign cars being imported into the US and we still lost the war there