Q.What is meant by Balance of Trade? State its types.

Balance of Trade looks only at a country's trade in physical goods, and can go one of three ways depending on which side is bigger.

Balance of Trade (BOT), also called the trade balance, is the difference between the value of a country's visible exports (goods physically shipped out) and its visible imports (goods physically brought in) during a given period, usually a year. It covers only tangible merchandise trade — services, income and transfers are excluded.

Types of Balance of Trade:

1. Favourable (surplus) Balance of Trade — Exports > Imports. The country earns more from selling goods abroad than it spends on buying them.
2. Unfavourable (deficit) Balance of Trade — Imports > Exports. The country spends more on imports than it earns from exports.
3. Balance of Trade at Equilibrium — Exports = Imports.

Confusing Balance of Trade with Balance of Payments and including services/capital flows in it; also calling a deficit BOT 'unfavourable' without realising the overall BOP can still be favourable if invisibles/capital inflows are strong.