International trade transactions other than merchandise goods are termed as invisible trade balance. It includes services, investment income and current transfers. On the other hand, merchandise goods are other major part of the trade balance. You know that Visible and Invisible trade balance are part of current account of balance of payments.
To find out overall trade balance, it is essential to know the net services trade balance as well as merchandise goods with outside world.
Understanding trade balance
Really, trade balance has strong bearing on the balance of payments as it constitute the large portion of transactions within a year.
Trade balance is a balance between monetary value of export and imports of goods and services by a given country with outside world.
Hence, a detailed explanation of visible or invisible trade balance is essential to know more about balance of payments and economic state of the nation.
Relations between trade balance and balance of payments
Balance of payments is a summary of statement of all the economic transactions between a country and outside world within a year. Country means individuals, business firms, and government agencies.
For layman’s terms, balance of payments measures the flow of assets instead of stocks of assets. It takes account of volume of transactions occurred within a year.
As I discussed in the previous blog that the purpose of accounting balance of payments is to know the state of economy of nation as well as nation’s relations with outside world.
Most importantly, balance of payments doesn’t mean the balance sheet of a country that includes stocks of assets instead flow.
Definition of trade balance or balance of trade
In simple terms, trade balance or balance of trade is the difference between monetary value of export including goods and services and imports from rest of the world in a year.
BOT = monetary value of export of goods and services – monetary value of imports of goods and services. (In a year)
Balance of payments is a indicator of country’s economic health. On the other hand, balance of trade or trade balance is a yardstick to judge whether a country is self reliant or overlay depends on outside world.
Difference between Trade deficit and trade surplus
Suppose, if a country exports more goods and services than that of its imports in a year in terms of monetary value, is termed trade surplus or favourable trade balance.
Conversely, if the same nation imports more goods and services than that of its exports in the monetary value in a year, is called trade deficit.
Probably, trade deficit doesn’t mean that the health of economy of nation is poor; nor trade surplus concludes better state. In the today’s world, most of the progressive nations including USA have trade defict.
Explanation of invisible trade balance
Nations trade with one another in goods and services. Cars, bikes, mobiles, laptops, oil, steel, etc. are termed as goods or physical goods.
And, other than merchandise goods like, tourism, education, health, shipping services, outsourcing, insurance companies, financial institutions etc. are labelled as services which traded at the global economy.
Trade in services like medical tourism, education and insurance.
Global Medical tourism
Global Medical Tourism Market Size Report Predicted to be Worth USD 125.8 Billion By 2026, at 16.3% CAGR Growth: Polaris Market Research — Medgadget.
Clearly, medical tourism is the most booming sector in the world economy. When a patient from a nation travels other nation to get effective treatment, it is called medical tourism. It may be form developing to developed and vice-versa.
Earlier, it was the need for people from poor countries to search for effective treatment in the developed nations. But, nowadays, medical tourism has widened its ambit beyond treatment to spa and wellness tourism. Hence, developing as well as developed nations where centers are cost effective, are in better position to reap future benefits of medical tourism.
Global education sector
Education sector has been one of the fastest growing in the world where technology is making everything ease.
The Mobile Learning Market Is Expected To Reach $155 Billion By 2026 Due To Rising Demand For Digital Education As Per The Business Research Company’s Mobile Learning Global Market Report 2022 — Global News Wire.
Apart from developed nations, many emerging economies are presenting themselves as the global education hubs.
Simply, service sector in the invisible trade has been growing so rapidly at the global economy. All the international transactions occurred in the services between nations included in the invisible trade balance.
Investment income — meaning and examples
Investment income in the invisible trade balance is the second most important component after services. It includes interest earned on savings bank accounts you have.
Second, if you have invested in stocks, bonds, mutual funds, etc.you receive dividends on the sale of these financial assets.
Third, if you have financial assets other than stocks, bonds, mutual funds like gold, after selling it, you will receive profits.
In other words, interest, dividends, and profits are the means of investment income one can receive in return for its investment in the foreign countries. All the investment income received from foreign countries is the part of the invisible trade balance of current account.
Current transfers — Meaning and examples
Unlike services and investment income, current transfers are unilateral transfers without expectations in return. It means that nation receives the current transfers isn’t obliged to return.
Current transfers includes, workers remittance, donations, and gift’s from international community. Workers working in the other countries send back theirs salaries from which they migrated.
In case of disaster, country receives donations from international people in the form of cash or commodities.
Moreover, many charities, trusts, religious institutions regular receive donations and gifts for theirs work for social welfare across the world. All are the part of the current transfers of invisible trade balance of current account.
Concluding remarks on invisible trade balance
Eventually, invisible trade balance, services constitutes large portion of account. In the rapidly integrating world, the share of investment income has been growing phenomenally. But, current transfers is too vague to count and its size is not that like earlier both.
Unquestionably, invisible trade balance indicates that whether the country is excelling in services or not. If the country domestically progressive in service sectors like education, health, insurance, finance, it has definitely upper hand in the global economy.
Finally, in a nutshell,
In reality, trade balance or balance of trade has an important impact on the current account in particular and balance of payments in general. However, it doesn’t mean that the only trade balance manifest the true economic state of the nation.
Yes, balance of trade is an absolute indicator of whether a country depends on outside world or self reliant, especially, for its needs. Nowadays, the economic superpower USA has negative trade balance; whereas, rising power China has positive trade balance or balance of trade.
Despite, the health of economy of USA is good. This is all about the explanation of trade balance or balance of trade. In the next blog, I’m going to explain the current account of balance of payments in detail.
This is all about the description of invisible trade balance. In the next blog, I’m going to write on the investment income in detail.
Solved questions on visible and invisible trade balance.
For more clarity and understanding of the given topic visible and invisible trade balance, Here are some useful solved questions.
Q. 1. What does trade balance means?
Ans: Trade balance is a balance between monetary value of export and imports of goods and services by a given country with outside world. If the Trade balance is positive, it is a good sign economy and economic health. Otherwise, not a good sign.
Yes, balance of trade is an absolute indicator of whether a country depends on outside world or self reliant, especially, for its needs.
Q.2. What is invisible trade balance?
Ans: Invisible trade balance includes services like medical tourism, education, health, insurance, etc. And, investment income as well as current transfers. Nowadays, invisible trade balance plays big role in balancing the overall trade balance.
Explaining Balance of payments