What is a 'Trade Surplus'
A trade surplus is an economic measure of a positive balance of trade, where a country's exports exceed its imports. A trade surplus represents a net inflow of domestic currency from foreign markets and is the opposite of a trade deficit, which represents a net outflow. Balancing international trade is an important economic factor for a country; when a nation has a trade surplus, its exports exceed its imports during a specified period of time.
BREAKING DOWN 'Trade Surplus'In the United States, trade balances are reported monthly by the Bureau of Economic Analysis. A country’s trade balance is a leading factor influencing the value of its currency in the global markets. With a trade surplus, a country has control of the majority of its own currency through trade. In many cases, a trade surplus helps to strengthen a country’s currency; however, this is dependent on the proportion of goods and services of a country in comparison to other countries as well as other market factors. Countries can also highly control their currency through foreign investment efforts.
When just focusing on trade effects, a trade surplus means there is high demand for a country’s goods in the global market, which pushes the price higher and leads to a direct strengthening of the domestic currency. Countries with a trade surplus often continue to increase their exports over their imports as goods and services become more highly relied upon internationally.
The opposite of a trade surplus is a trade deficit. A trade deficit occurs when a country imports more than it exports. A trade deficit typically also has the opposite effect on currency. When imports exceed exports, a country’s currency demand in terms of international trade is lower. Lower demand for a currency makes it less valuable in the international markets.
While trade balances highly affect currency fluctuations in most cases, there are a few factors countries can manage that make trade balances less influential. Countries can manage a portfolio of investments in foreign accounts to control the volatility and movement of the currency. Additionally, countries can also agree on a pegged currency rate that keeps their currency constant at a fixed rate. If a currency is not pegged to another currency, it is considered floating. Floating currency rates are highly volatile and subject to daily trading within the currency market. The currency market is one of the global financial market’s largest trading arenas. As of 2014, over $5 trillion trade daily in the global currency market.