Balance Of Trade, a term in economics belonging originally to the period when the "mercantile theory" prevailed, but still in use, though not quite perhaps in the same way as at its origin. The "balance of trade" was then identified with the sum of the precious metals which a country received in the course of its trading with other countries or with particular countries. There was no doubt an idea that somehow or other the amount of the precious metals received represented profit on the trading, and each country desired as much profit as possible. Princes and sovereigns, however, with political aims in view, were not close students of mercantile profits, and would probably have urged the acquisition of the precious metals as an object of trade even if they had realized that the country as a whole was exporting "money's worth" in order to buy the precious metals which were desired for political objects. The "mercantile theory" was exploded by Adam Smith's demonstration that gold and silver were only commodities like others with no special virtue in them, and that they would come into a country when there was a demand for them, according to the amount, in proportion to other demands, which the country could afford to pay; but the ideas in which the theory itself has originated have not died out, and the idea especially of a "balance of trade" to which the rulers of a country should give attention is to be found in popular discussions of business topics and in politics, the general notion being that a nation is prosperous when its statistics show a "trade balance" in its favour and unprosperous when the reverse is shown.
In modern times the excess of imports over exports or of exports over imports, shown in the statistics of foreign trade, has also come to be identified in popular speech with the "balance of trade," and many minds are no doubt imbued with the ideas (1) that an excess of imports over exports is bad, and (2) an excess of exports over imports is the reverse, because the former indicates an "unfavourable" and the latter a "favourable" trade balance. In the former case it is urged that a nation so circumstanced is living on its capital. Exact remedies are not suggested, although the idea of preventing or hampering foreign imports as a means of developing home trade and of thus altering the supposed disastrous trade balance is obviously the logical inference from the arguments. A consideration of these ideas and of recent discussions about imports and exports, appears accordingly to be needed, although the "mercantile theory" is itself exploded.
The phrase "balance of trade," then, appears to be an application of a trader's language in his own business to the larger affairs of nations or rather of the aggregate of individuals in a nation engaged in foreign trade. A trader in his own books sets his sales against his purchases, and the amount by which the former exceed the latter is his trade balance or profit. What is true of the individual, it is assumed, must be true of a nation or of the aggregate of individual traders in a nation engaged in the foreign trade. If their collective sales amount to more than their collective purchases the trade balance will be in their favour, and they will have money to receive. Contrariwise, if their purchases amount to more than their sales, they will have to pay money, and they will presumably be living on their capital. The argument fails, however, in many ways. Even as regards the experience of the individual trader, it is to be observed that he may or may not receive his profit, if any, in money. As a rule he does not do so. As the profit accrues he may invest it either by employing labour to add to his machinery or warehouses, or by increasing his stock-in-trade, or by adding to his book debts, or by a purchase of stocks or shares outside his regular business.
At the end of a given period he may or may not have an increased cash balance to show as the result of his profitable trading. Even if he has an increased cash balance, according to the modern system of business, this might be a balance at his bankers', and they in turn may have invested the amount so that there is no stock of the precious metals, of "hard money," anywhere to represent it. And the argument fails still further when applied to the transactions between nations, or rather, to use the phrase already employed, between the aggregate of individuals in nations engaged in the foreign trade. It is quite clear that if a nation, or the individuals of a nation, do make profit in their foreign trading, the amount may be invested as it accrues - in machinery, or warehouses, or stock-in-trade, or book debts, or stocks and shares purchased abroad, so that there may be no corresponding "balance of trade" to bring home. There is no doubt also that what may be is in reality what largely happens. A prosperous foreign trade carried on by any country implies a continuous investment by that country either abroad or at home, and there may or may not be a balance receivable in actual gold and silver.
In another particular the argument also fails. In the aggregate of individual trading with various countries, there may sometimes be purchases and sales as far as the individuals are concerned, but not purchases and sales as between the nations. For example, goods are exported from the United Kingdom, ammunition and stores and ships, which appear in the British returns as exports, and which have really been sold by individual British traders to individuals abroad; but these sales are not set off by any purchases on the other side which come into the international account, as the set-off is a loan by the people of one country to the people or government of another. The same with the export of railway and other material when goods are exported for the purpose of constructing railways or other works abroad. The sales are made by individuals in the United Kingdom to individuals abroad; but there is no set-off of purchases on the other side. Mutatis mutandis the same explanation applies to the remittance of goods by one country to another, or by individuals in one country to individuals in another to pay the interest or repay the capital of loans which have been received in former times.