Balance of trade, types of trade and free trade

The balance of trade compares the value of a country's exports with the value of its imports:

• If imports are worth more than exports, the balance is negative, or unfavourable.
• If exports are worth more than imports, it is positive, or favourable.

A country with a negative balance for a long time spends more than it earns, and this eventually exhausts its financial reserves.

Types of trade:

• Bilateral trade is between two countries, which agree to trade in certain goods.
• Multilateral trade is with many countries. A country may give some partners Most Favoured Nation (MFN) status, meaning they get trade terms as good as those given to anyone else.

Free trade means opening up an economy by lowering tariffs and other trade barriers, so that goods and services from everywhere can compete with domestic ones.

But free trade has risks. Developed countries may dump goods on other markets: selling them at prices unrelated to their cost of production, often far below it. Dumping can ruin domestic producers, who cannot compete with such low prices. So countries must guard against it.