ABSTRACT
Trade balances share a basic characteristic of overall trade policy: Both are economic concepts containing sufficient complexity and ambiguity to convert them into political phenomena. A nation's foreign trade position is in many ways the end product of developments originating within its domestic economy. There is an extremely close correlation between a successful set of domestic economic indicators—price stability, high rates of saving and investment, productivity increases, enlightened management, product innovation, and so on—relative to other countries and a strong, competitive foreign trade position in which exports exceed imports. Events in the international monetary system in general and changes in the value of a country's currency relative to other currencies—its exchange rate—are also critical variables that influence a country's import and export flows. Exchange rates largely determine the local currency prices of imports, which begin as foreign goods denominated in foreign currency and are then quoted in a price denominated in local currency.
