why is favourable balance of trade is desired for an economy
Answers
Most countries try to create trade policies that encourage a trade surplus. They consider a surplus a favourable trade balance because it's like making a profit as a country. Nations prefer to sell more products and receive more capital for their residents. It translates into a higher standard of living. Their companies also gain a competitive advantage in expertise by producing all the exports. They hire more workers, reducing unemployment and generating more income.
To maintain this favourable trade balance, leaders often resort to trade protectionism. They protect domestic industries by levying tariffs, quotas, or subsidies on imports. That doesn’t work for long. Soon other countries retaliate with their protectionist measures. A trade war will reduce international trade for all nations.
But sometimes a trade deficit is the more favourable balance of trade. It depends on where the country is in its business cycle. For example, Hong Kong has a trade deficit. But many of its imports are raw materials that it converts into finished goods and then exports. That gives it a competitive advantage in manufacturing and finance. It creates a higher standard of living. Canada's slight trade deficit is a result of its economic growth. Its residents enjoy a better lifestyle afforded by diverse imports.
Romania's former dictator, Nicolae Ceausescu, created a trade surplus that hurt his country. He used protectionism to bolster domestic industries. He also forced Romanians to save instead of spending on imports. That resulted in such a low standard of living that the people forced him out of office.