Invisible Trade Balance Essay ⋆ Business Essay Examples ⋆ EssayEmpire

Invisible trade balance (ITB) refers to the net monetary value resulting from a country’s international trade in invisibles during a given period of time, and it forms an important component of the country’s balance of payments (BOP). ITB can be defined as the difference between the total monetary value of invisible exports (exports of intangibles) and invisible imports (imports of intangibles) of a country during a specified period of time, in general, a year or a quarter for which the country’s BOP records are prepared.

In general practice, ITB is calculated as the total monetary value of invisible exports minus the total monetary value of invisible imports. As a result, for a period in which the total value of invisible exports exceeds the total value of invisible imports, ITB records a positive value indicating a surplus. When the total value of invisible imports exceeds the total value of invisible exports, ITB results in a negative value indicating a deficit for that period. Thus, ITB indicates the surplus or deficit resulting from a country’s international trade flows in invisibles during a given period of time. The international trade involving invisibles (or intangibles) is most often referred to as the international trade in services. Therefore, ITB is also most often referred to as the services balance (or services trade balance) in BOP. However, invisible trade and invisible trade balance are the popular terms still used in the United Kingdom and some of its former colonies.

ITB constitutes an integral part of a country’s BOP. BOP is a comprehensive record of a country’s international transactions with the rest of the world during a given period of time and is comprised of two main accounts, namely, the current account and the capital account. The transactions resulting in capital inflows and outflows are recorded in the capital account. The current account is comprised mainly of the accounts dealing with visible trade (merchandise trade), invisible trade (services trade), and transfers. Some countries, such as the United Kingdom, include receipts and payments of transfers also among the invisibles, while many other countries, like the United States, include transfers as a separate item in the current account. Following the principle of double-entry accounting, the international transactions resulting in receipts from nonresidents are recorded as credit (+) entries and the international transactions resulting in payments to nonresidents are recorded as debit (–) entries in BOP. According to the same principle, the exports are recorded as credit (+) entries and the imports are recorded as debit (–) entries. ITB can therefore be simply defined as the sum total of invisible exports and imports during a specified time period.

The main components of trade in services that are recorded in BOP include transportation, travel, communication services, construction services, insurance, financial services, computer and information services, royalties and license fees, personal, cultural and recreational services, other business services, and government services. Relative to international trade flows in visible goods, the definition and measurement of international trade flows in invisibles are more difficult. Invisibles are also inherently less tradable than visible goods. International trade in visible goods is characterized by the cross-border movements of physical objects. However, the international trade in invisibles is not always characterized by such physical cross-border movements. There are at least four modes in which the trade in services can take place: cross-border supply (the service is traded by the supplier in one country to a consumer in another country without either one of them moving to the country of the other), consumption abroad (the consumer moves to the country of the supplier to consume the service), foreign presence (suppliers in one country supply their services through their affiliates in other countries), and the presence of natural persons (an individual moves to the country of the consumer to supply the service on his or her own behalf or on his or her employer’s behalf ).

The importance of services-producing sectors, which are collectively known as the tertiary sector, and their export has increased over time both in developed and developing countries. As a result, ITB in many developed countries recorded increasing surpluses in the recent past, and these surpluses helped offset deficits in merchandise trade in some of those countries. At present, the OECD countries, which are net exporters of services as a group, account for about three-quarters of world exports of services. The categories of services that recorded a faster growth during the period from 2000 to 2005 include the following: computer and information services, financial and insurance services, communication services, and other business services. Some developing countries such as India also had similar experiences. However, the deficits in invisible trade balance in a large number of developing countries have been directly related to their growing problems of international indebtedness.

Bibliography:

International Financial Services London (IFSL), World Invisible Trade 2007 (August 2007);
Duncan McKenzie, “UK Trends in Invisible Trade and Financial Markets,” European Business Journal (v.9/4, 1997);
Organisation for Economic Co-operation and Development (OECD), Main Economic Indicators (November 2007);
United Nations Department of Economic and Social Affairs (UNDESA), Manual on Statistics of International Trade in Services (UNDESA Statistics Division, 2002).

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