What is a Trade Deficit?
A Trade Deficit describes a country with a negative trade balance, wherein the total value of the country’s net imports exceeds the total value of its exports to other countries.
How Does a Trade Deficit Work in Economics?
A country in a trade deficit is importing more goods than they are exporting, so there are more purchases being made from other countries than sales to other countries.
In economics, a country’s balance of trade, or “trade balance”, can be determined by comparing the dollar value of the country’s imports to its exports.
- Imports → The total value of the products the country buys from other countries
- Exports → The total value of the products the country sells to other countries
The formula for calculating a country’s current balance of trade takes the value of a country’s imports and subtracts that figure from the value of its exports.
The trade balance formula is as follows.
If the trade balance is negative — i.e. the country is in a trade deficit — the total value of the country’s imports exceeds the total value of its exports.
- Trade Deficit → Imports > Exports (Negative Trade Balance)
The near-term and long-term effects of a trade deficit are usually viewed as having a negative impact on the country’s economic health.
For instance, deficits are associated with reduced demand for the country’s goods, which directly causes the value of its currency to decline relative to the currencies of other countries.
If a country’s imports exceed its exports over the long run, the country’s trade deficit can see its currency become devalued in the global markets as a result of the reduced demand.
Most countries in a trade deficit will attempt to cut the deficit by undergoing initiatives to increase export volume while decreasing import volume.