Measuring International Trade (Leaving Cert Business): Revision Notes
Measuring international trade
Understanding how Ireland measures its trading relationships with other countries is crucial for analysing our economic performance. There are two main methods used to track international trade flows: the balance of trade and the balance of payments.
The balance of trade
The balance of trade focuses specifically on physical goods that can be seen and touched - these are called visible exports and imports.
Balance of trade = The difference between the value of visible exports and visible imports
When we calculate the balance of trade, we use this formula:
Balance of trade = Visible exports - Visible imports
The result tells us whether Ireland has a trade surplus or trade deficit:
- Surplus: When visible exports exceed visible imports (positive result)
- Deficit: When visible exports are less than visible imports (negative result)
For example, if Ireland exports €214 million worth of physical goods but imports €230 million worth, we have a trade deficit of €16 million.
Balance of invisible trade
Alongside physical goods, countries also trade in services that cannot be physically seen - these are invisible exports and imports. Examples include tourism, financial services, and software development.
Balance of invisible trade = The difference between the value of invisible exports and invisible imports
The calculation follows the same principle:
Balance of invisible trade = Invisible exports - Invisible imports
Ireland often performs strongly in invisible trade due to our significant services sector, particularly in areas like technology and financial services.
The balance of payments
The balance of payments provides the complete picture by combining both visible and invisible trade flows. This measure shows the total amount of money flowing into or out of Ireland over a year.
Balance of payments = The difference between total exports (visible and invisible) and total imports (visible and invisible)
There are two ways to calculate the balance of payments:
Method 1:
Balance of payments = Total exports - Total imports
Method 2:
Balance of payments = Balance of trade + Balance of invisible trade
Understanding the implications
A surplus in the balance of payments means Ireland earns more from exports than it spends on imports. This is positive because:
- More money flows into the country than leaves it
- The government can use extra funds to improve public services
- National debt can be reduced
- Tax rates might be lowered
A deficit means Ireland spends more on imports than it earns from exports. This creates challenges because:
- Too much money leaves the country
- The government may need to borrow money or raise taxes
- Jobs in Ireland could be at risk
Methods of reducing a balance of payments deficit
| Method | Explanation |
|---|---|
| Import substitution | Encouraging consumers to buy Irish-made products instead of foreign alternatives. For example, choosing Irish-produced food brands over imported ones |
| Increase exports | Growing the number of Irish products and services sold internationally |
| Government support | Agencies like Enterprise Ireland help Irish businesses expand into international markets |
Worked Example: Calculating Ireland's Trade Balance
Given data:
- Visible exports: €214 million
- Visible imports: €230 million
- Invisible exports: €176 million
- Invisible imports: €154 million
Calculations:
(a) Balance of trade: Balance of trade = €214m - €230m = -€16m (deficit)
(b) Balance of invisible trade: Balance of invisible trade = €176m - €154m = +€22m (surplus)
(c) Balance of payments: Using Method 2: Balance of payments = (-€16m) + (+€22m) = +€6m (surplus)
This example shows how Ireland can have a deficit in visible trade but still achieve an overall surplus due to strong performance in invisible trade (services).
Key Points to Remember:
- Balance of trade measures only physical goods (visible exports vs imports)
- Balance of invisible trade measures only services (invisible exports vs imports)
- Balance of payments combines both visible and invisible trade to show total money flows
- A surplus is positive (more money coming in), while a deficit is negative (more money going out)
- Ireland can reduce deficits through import substitution, increasing exports, and government support for businesses