A trade deficit occurs when net exports are negative and when a country imports more goods than it exports. The trade deficit equals the value of imported goods minus the value of exported goods. If a country exports more goods and services than it imports, it has a trade surplus.
Key Takeaways
- A trade deficit is an economic condition when a country imports more goods than it exports.
- The trade deficitequals the value of goods imported minus the value of goods exported.
- If a country exports more goods and services than it imports, it has a trade surplus.
How Trade Deficits Work
A country's trade deficit or surplus represents the difference between its imports and exports. The balance of trade is denominated in the local currency of the country for which it is calculated. If the United Kingdom imports £800 billion worth of goods while it exports only £750 billion, its trade deficit, or net exports, is £50 billion.
Measuring a country's net imports or exports can be challenging. Investment flows in and out of the country, and how much is spent on imports, also determines a country's balance of payments.
Trade balances in the U.S. are reported by theBureau of Economic Analysis(BEA). In Oct. 2023, the U.S. monthly trade deficit increased from $61.2 billion in September to $64.3 billion in October as exports decreased and imports increased.
Balance of Payments
Balance of payments (BOP) is a net figure that shows how much money is leaving or coming into a country. All trade is included in the BOP figure, including the trade deficit or surplus and investment flows from the private and public sectors. These flows are accounted for in the current account and the financial account. The net amounts of these accounts are totaled to calculate the balance of payments.
The current account measures the amounts in importing and exporting goods and services, any interest earned from foreign sources, and any money transfers between countries. The financial account includes total changes in foreign and domestic property ownership.
Deficits and Stock Markets
A sustained trade deficit could adversely affect a country and its markets. If a country has been importing more goods than exporting for a prolonged period, it could be going into debt. A decline in spending on domestically produced goods hurts domestic companies and their stock prices. As a result, investors may invest in opportunities in foreign stock markets.
Conversely, trade deficits can occur when a country is expanding and growing. Emerging markets may have trade deficits as they build infrastructure, factories, and housing to support a growing economy. Once the industries have been established, an emerging market could import less.
A rise in exports contributes positively to economic growth because it essentially increases foreign sales for domestic companies. Higher economic growth could lead to a rise in consumer spending, resulting in more purchases of imports. The growing economy would lead to a higher stock market. As a result, a trade deficit could coexist during economic expansion and a rising market.
Why Do Trade Deficits Occur?
A trade deficit can occur for several reasons, but typically a country has a deficit when it's unable to produce enough goods for its consumers and businesses, possibly due to a lack of resources. For example, Canada exports seafood, oil, and lumber, while China exports electronics, clothing, footwear, and steel.
Does a Trade Deficit Signal a Bad Economy?
A trade deficit isn't necessarily a bad sign for an economy. On the contrary, a deficit could be a signal that a country’s consumers are wealthy enough to purchase more goods than their country produces.
What Is a Trade Surplus?
A trade surplus is a positivetrade balance where a country'sexportsexceed imports.
The Bottom Line
A trade deficit occurs when a country imports more goods than it exports. If a country exports more goods and services than it imports, it has a trade surplus. If a country imports more goods than exports, this decline in spending on domestically produced goods affects domestic companies, and investors may seek opportunities in foreign stock markets.
