A country's balance of trade and its current accounts are economic metrics that gauge the relationship between how much the country imports and how much it exports. A country that exports more than it imports has a trade surplus, while a country that imports more than it exports has a trade deficit. Conventional wisdom states that trade deficits are bad for a country's economy. Analysts who oppose trade deficits argue that imports exceeding exports leads to jobs, particularly in manufacturing, being lost domestically and replaced by overseas workers. However, other analysts counter that economic trends do not corroborate such fears; in the United States, periods of high trade deficits have coincided with low unemployment and high economic output. Trade deficits, these analysts argue, enable a country to import capital cheaply and use it to invest in domestic production.

The argument that trade deficits lead to foreign workers doing manufacturing work that otherwise would be done domestically makes sense on its surface. However, economic trends measured in the U.S. since the early 1970s do not bear it out. During the 26-year period from 1973 to 2009, the U.S.' current account deficit (measured as a percentage of GDP) grew during 15 of those years and shrank during 11 of them. The nation's economy, measured by real GDP growth, performed better during the years of rising trade deficits than it did when the deficit was shrinking. The average rate of economic growth was 3.2% during the rising deficit years, compared to 2.3% during the shrinking deficit years.

GDP is not the only economic indicator that has historically improved in the U.S. as trade deficits have risen. Unemployment fell by an average of 0.4% during years with a growing trade deficit and rose by 0.4% in those years when the trade deficit shrank.

Analysts point to inexpensive capital, consumer confidence and low inflation as beneficial byproducts of trade deficits, particularly in the U.S. The strong U.S. dollar enables the country to obtain capital more cheaply from abroad than can be produced domestically. Once obtained, that capital is used by domestic firms and manufacturers to grow, expand, and develop new innovations and technologies. While the work of producing basic capital is performed abroad, domestic companies use that capital to grow, which creates better, higher-paying jobs at home.

Importing goods from overseas also boosts consumer confidence and helps keep inflation low. The low prices of overseas goods translates to an increase in purchasing power for domestic consumers. The ability to purchase the same products for less money gives consumers more confidence as it allows their wages to go further, resulting in an increase in real wages. Lower prices equate to lower inflation, which helps offset other potential economic maladies such as slow wage growth.

  1. At what level is the current account deficit considered excessive, in terms of percent?

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  2. Is a current account deficit good or bad for the economy?

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  3. Which countries run the largest budget deficits?

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  4. Why do developed countries run current account deficits?

    Discover why developed countries tend to run current account deficits and why running a current account deficit is not a ... Read Answer >>
  5. What is a trade deficit and what effect will it have on the stock market?

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  6. When has the United States run its largest trade deficits?

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  1. Trade Deficit

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  2. Current Account Deficit

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  3. Deficit

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  5. Fiscal Deficit

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