TRADE, BALANCE OF

difference in value over a period of time between a nation's imports and exports of goods and services, usually expressed in the unit of currency of a particular nation (e.g., dollars for the United States, pounds sterling for the United Kingdom). The balance of trade is part of a larger economic unit, the balance of payments (the sum total of all economic transactions between residents of one country and those of other countries), which includes capital movements (money flowing to a country paying high interest rates of return), loan repayment, expenditures by tourists, freight and insurance charges, and other payments. If the exports of a nation exceed its imports, the nation is said to have a favourable balance of trade, or a trade surplus. Conversely, if the imports exceed exports, an unfavourable balance of trade, or a trade deficit, exists. According to the economic theory of mercantilism, current in Europe from the 16th to the 18th century, a favourable balance of trade was viewed as an absolute necessity. This was to be achieved by establishing colonies that would buy the products of the mother country and would export raw materials, particularly precious metals, seen as the indispensable source of a nation's wealth and power. According to the Classical economic theory of the mid-18th century, a nation need not maintain an even exchange or build a surplus in its balance of trade (or in its balance of payments), over time, to finance its purchase of foreign goods and to maintain its export trade. A continuing surplus may, in fact, be viewed as economically undesirable, as it may represent underutilized resources that might have been directed towards the purchase or production of goods or services as a means of increasing a nation's wealth. Furthermore, a surplus accumulated by a nation (or group of nations) may have the potential of producing sudden and uneven changes in the economies of those nations in which the surplus is eventually spent. Such a situation developed in the 1970s and '80s when the member nations of the Organization of Petroleum Exporting Countries (OPEC) suddenly and rapidly increased the price of petroleum. Because the OPEC prices were established in dollars, importers were forced to acquire dollars to pay for their purchases, and the OPEC member states accumulated vast surpluses of dollars. Generally, the so-called third world, or developing, nations (unless they have a monopoly on a vital commodity) have particular difficulty maintaining surpluses since the terms of trade during periods of recession work against them; that is, they have to pay relatively higher prices for the finished goods they import but receive relatively lower prices for their exports of raw materials or unfinished goods.