Distinguish between a favorable balance of trade and an unfavorable balance of trade with reference to international trade.
Answer
A favorable balance of trade occurs when the value of exports exceeds imports, while an unfavorable balance occurs when the value of imports exceeds exports.
Step-by-step solution
- Define balance of trade: The balance of trade of a country is the difference between the monetary value of its exported goods and imported goods.
- Define favorable balance of trade: If the total value of exports is greater than the total value of imports, the country has a favorable or positive balance of trade.
- Define unfavorable balance of trade: If the total value of imports is greater than the total value of exports, the country has an unfavorable or adverse balance of trade.
Common mistake: Students often confuse exports and imports, incorrectly assuming that importing more goods leads to a favorable balance of trade.
Concept tested: Balance of Trade Concept
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