A country's balance of trade is defined by its net exports (exports minus imports) and is thus influenced by all the factors that affect international trade. These include factor endowments and productivity, trade policy, exchange rates, foreign currency reserves, inflation and demand. A crucial point to note is both goods and services are counted for exports and imports, as a result of which a nation has a balance of trade for goods (also known as the merchandise trade balance) and a balance of trade for services. A nation has a trade surplus if its exports are greater than its imports; if imports are greater than exports, the nation has a trade deficit.
Factor Endowments
Factor endowments include labor, land and capital. Labor describes the characteristics of the workforce. Land describes the natural resources available, such as timber or oil. Capital resources include infrastructure and production capacity. The Heckscher-Ohlin model of international trade emphasizes differences in these areas to explain trade patterns. For example, a country with an abundance of unskilled labor produces goods requiring relatively low-cost labor, while a country with abundant natural resources is likely to export them.
The productivity of those factors is also important. For example, suppose two countries have the same amount of labor and land endowments. However, one country has a skilled labor force and highly productive land resources, while the other has an unskilled labor force and relatively low-productivity resources. The skilled labor force can produce relatively more per person than the unskilled force, which in turn influences the types of work in which each can find a comparative advantage. The country with skilled labor might be better-suited to designing highly complex electronics, while the unskilled labor force might specialize in simple manufacturing. Similarly, the efficient use of natural resources can mean relatively more or less value extracted from a similar initial endowment.