The balance of trade refers to the relationship between the monetary value of a nation's imports and exports. As put forth by mercantilist writers starting in the 16th century, a favorable balance of trade was seen to be one in which the exports of a country exceed its imports thereby increasing its inflow of gold and silver, and thus its wealth.
Even though rebutted as early as Adam Smith and David Hume, the idea that a trade deficit is detrimental to a nation's economy persists. In particular, Keynesian economists emphasize the balance of trade and the long-term negative effect of trade imbalance on economies. They assume that nations should adjust toward a state of balance.
On the other hand, free market economists maintain that trade deficits in and of themselves are not problematic. Discussions of the U.S. trade deficit tend to focus on the difference between its imports and exports of goods and services. But that is not the only way in which trade occurs. Money that flows out of a country to pay for foreign imports can return in the form of investments--stocks, bonds, real estate, treasury bills, businesses--into its capital markets. Hence, its trade deficit also means that the U.S. has been enjoying a capital account surplus, which suggests that it has a comparative advantage over other countries in terms of better investment opportunities.
This topic provides a definition and theories concerning balances of trade as well as opinions regarding the consequence of trade deficits from various perspectives.