Trade Flows -How To Measure Exports and Imports?

Trade flows are the basis for measuring all international exports and imports.

Countries that are net exporters, one who exports more goods to international clients than they import from international producers, will experience net trade surplus.

Countries with net trade surplus will likely experience their currencies appreciate in value.

International clients interested in transacting business with net trade surplus countries must first buy the local currencies in order to buy the desired goods/services, thus creating demand for the trade surplus country's currencies.

On the other hand, countries that are net importers, one who imports more good from international producers will experience net trade deficit.

In order to purchase goods/services from international producers/providers, the net trade deficit countries must first sell their local currencies to buy the currency of exporting country.

On a large scale this devalues the net trade deficit country's currency due to excess supply of its currency.

To illustrate how this trade flow occurs, I will consider the case of Japan and the U.S.A.

import-export-graph Import & Export Graph

Japan as one of the world's largest exporter of consumer goods often experience net trade surplus.

International clients transacting business with Japan must first buy Japanese Yen to cover the cost of purchases goods/services. This result in excess demand for Yen and hence Yen will likely appreciate in value despite Japan's zero interest rate policy.

The U.S.A, on the other hand, imports more goods/services from foreign market namely China pushing the country into net trade deficit zone.

In order for the U.S. to import goods/services from the international market it must first sell it's U.S. dollar and buy a local currency of the country it wants to transact business with. This in long term results in devaluation of the U.S. dollar which we've been experiencing in the last few years.

The bottom line -if you plan to make successful career in forex trading, monitoring these supply and demand forces of a specific country that you want to trade the currency of will reward you the best.

So how would you employ ideas of trade flows in your trading?

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