A:

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.

RELATED FAQS
  1. What is the difference between a current account deficit and a trade deficit?

    Learn the meanings of the macroeconomic terms current account deficit and trade deficit, and understand the differences between ... Read Answer >>
  2. At what level is the current account deficit considered excessive, in terms of percent?

    Take a deeper look at the variables that impact current account deficits, and learn why not all types of deficits have equal ... Read Answer >>
  3. 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 >>
  4. What is a trade deficit and what effect will it have on the stock market?

    A trade deficit, which is also referred to as net exports, is an economic condition that occurs when a country is importing ... Read Answer >>
  5. When has the United States run its largest trade deficits?

    Learn in what year the United States ran its largest negative balance of trade as a result of imports greatly exceeding the ... Read Answer >>
Related Articles
  1. Insights

    The Pros & Cons of a Trade Deficit

    Is a trade deficit, also known as a current account deficit, beneficial or detrimental to a country's economy?
  2. Insights

    Twin Deficits: Twice The Fun For The U.S

    The U.S. has been running both fiscal and current account deficits for years, but what does it all add up to?
  3. Personal Finance

    Current Account Deficits: Government Investment Or Irresponsibility?

    Deficit can be a sign of trouble for some countries, and of health for others. Find out what it means when more funds are exiting than entering a nation.
  4. Insights

    Current Account Deficit

    A current account deficit occurs when a country spends more money on the goods and services it imports than it receives for the goods and services it exports.
  5. Insights

    In Praise Of Trade Deficits

    When a country imports more than it exports, is it a recipe for disaster or just part of a larger cycle?
  6. Investing

    What does Current Account mean?

    The current account reflects the difference between a country’s savings and investments.
  7. Insights

    Exploring the Current Account in the Balance of Payments

    Learn how a country's current account balance reflects the country's economic health.
  8. Insights

    An Analysis Of The US Trade Deficit

    The United States' trade deficit is historically large, the biggest in the world. With luck, it'll get even larger.
  9. Insights

    How Much Does The U.S. Import From India?

    What is the value and composition of the U.S. trade deficit with its ninth largest trading partner?
RELATED TERMS
  1. Deficit

    The amount by which a resource falls short of a mark, most often ...
  2. Fiscal Deficit

    When a government's total expenditures exceed the revenue that ...
  3. Balance Of Trade - BOT

    The difference between a country's imports and its exports. Balance ...
  4. Deficit Hawk

    Slang for someone who wants the government to keep the federal ...
  5. Deficit Spending

    When a government's expenditures exceed its revenues, causing ...
  6. Trade Surplus

    An economic measure of a positive balance of trade, where a country's ...
Hot Definitions
  1. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  2. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  3. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  4. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  5. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  6. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
Trading Center