Invisible trade

3 key takeaways

• Invisible trade includes transactions such as financial services, tourism, intellectual property, and income from foreign investments.
• It plays a significant role in the balance of payments, impacting a country’s economic stability and international financial relationships.
• Understanding invisible trade is crucial for evaluating a country’s economic performance beyond the trade of physical goods.

What is invisible trade?

Invisible trade encompasses the exchange of services and intangible assets between countries. Unlike visible trade, which involves the export and import of physical goods, invisible trade includes activities such as financial services, insurance, tourism, intellectual property rights, and income from investments abroad. These transactions are essential components of a country’s balance of payments, influencing its overall economic health and international trade relationships.

Invisible trade transactions are recorded in the current account of a country’s balance of payments, alongside visible trade. The balance of these transactions helps determine whether a country has a surplus or deficit in its trade and financial dealings with the rest of the world.

Components of invisible trade

Services

• Financial services: Banking, insurance, and investment services provided to foreign clients.
• Tourism: Expenditures by foreign tourists in a country, including accommodation, dining, and entertainment.
• Transport services: Income from shipping and air transport services provided to foreign entities.
• Professional services: Legal, consulting, and educational services offered to foreign clients.

Intangible assets

• Intellectual property: Royalties and licensing fees received from foreign entities for the use of patents, trademarks, and copyrights.
• Franchising: Fees from foreign businesses operating under a franchise agreement.

Income flows

• Investment income: Earnings from investments in foreign assets, including dividends, interest, and profits from foreign subsidiaries.
• Remittances: Money sent back home by expatriates working abroad.

Importance of invisible trade

Economic contribution

Invisible trade contributes significantly to a country’s economy, often providing substantial revenue and supporting various industries. For instance, countries with strong financial services sectors, such as the United Kingdom, rely heavily on invisible trade to maintain economic stability.

Balance of payments

Invisible trade plays a crucial role in the balance of payments, helping offset deficits in visible trade. A positive balance in invisible trade can help a country achieve an overall surplus, enhancing its economic standing and creditworthiness.

Diversification

Engaging in invisible trade allows countries to diversify their economies and reduce dependence on physical goods exports. This diversification can make an economy more resilient to global market fluctuations and commodity price changes.

Examples of invisible trade

• United Kingdom: The UK’s financial services sector is a major contributor to its invisible trade, with London being a global financial hub.
• United States: The US earns significant income from intellectual property rights and technology services provided to foreign entities.
• Switzerland: Known for its banking and insurance services, Switzerland generates substantial revenue through invisible trade.

Invisible trade vs. visible trade

Visible trade

• Definition: Involves the export and import of physical goods such as machinery, clothing, and raw materials.
• Measurement: Typically measured in terms of volume and value of goods exchanged between countries.

Invisible trade

• Definition: Involves the exchange of services, intangible assets, and income flows between countries.
• Measurement: Measured in monetary terms based on the value of services provided and income received.

Related topics

• Balance of payments: Understand the comprehensive record of all economic transactions between residents of a country and the rest of the world.
• Trade balance: Explore the difference between a country’s exports and imports of goods and services.
• Globalization: Learn about the increasing interconnectedness of economies through trade, investment, and technology.

Consider exploring these related topics to gain a deeper understanding of how invisible trade affects a country’s economic performance and its role in the global economy.