Loading the player...

What is a 'Trade Deficit'?

A trade deficit is an economic measure of international trade in which a country's imports exceeds its exports. A trade deficit represents an outflow of domestic currency to foreign markets. It is also referred to as a negative balance of trade (BOT).

Trade Deficit = Total Value of Imports – Total Value of Exports

BREAKING DOWN 'Trade Deficit'

Nations of the world record their trades in their balance of payment (BOP) ledgers. One of the primary accounts in the balance of payments is the current account, which keeps track of the goods and services leaving (exports) and entering (imports) a country. The current account shows direct transfers such as foreign aid, asset income such as foreign direct investment (FDI)  and net income - income received by residents minus income paid to foreigners - and the BOT.

The trade balance is the largest section of the current account and measures the income that a country receives from its exports and the cost of imports. A country that exports more than it imports will have a trade surplus since the inflow of currency is greater than the outflow of currency. Most countries attempt to export more goods and services than they import to obtain greater currency inflows. However, it is not uncommon to see trade deficits in a country’s current account. Because the trade balance is the largest section of the current account, a trade deficit (or surplus) usually translates to a current account deficit (or surplus).

A trade deficit typically occurs when a country does not produce enough goods for its residents. Alternatively, a deficit means that a country’s consumers are wealthy enough to purchase more goods than the country produces. When production cannot meet demand, imports from other nations increase. A trade deficit is not necessarily detrimental because it often corrects itself over time. An increase in imported goods from other countries decreases the price of consumer goods in the nation as foreign competition increases. The lower prices help to reduce the threat of inflation in the local economy. An increase in imports also increases the variety and options of goods and services available to residents of a country. A fast-growing economy might import more as it expands to allow its residents to consume more than the country can produce. Therefore, a trade deficit could indicate a growing economy.

In the long run, however, a trade deficit may lead to the creation of fewer jobs. If the country is importing more goods from foreign companies, prices will go down, and domestic companies may be unable to produce and compete at the lower prices. Manufacturing companies are usually hit the hardest when a country imports more than it exports, and the result is fewer jobs or lower incomes for employees because of the competition from imports. Fewer jobs mean that fewer goods are produced in the economy which, in turn, could lead to even more imports and a greater deficit.

The US deficit has been growing for the past few decades, which has some economists worried. A substantial amount of U.S. dollars is held by foreign nations, who could decide to sell those dollars at any time. A substantial increase in dollar sales could devalue the currency making it costlier to purchase imports. In 2016, U.S. exports were $2.2 trillion and imports were $2.7 trillion. The trade deficit was approximately $500 billion – the United States imported $500 billion more than it exported.

RELATED TERMS
  1. Balance Of Trade - BOT

    The balance of trade is the difference between a country's import ...
  2. Current Account Deficit

    A current account deficit occurs when the total value of goods ...
  3. Deficit

    A deficit is the amount by which a resource falls short. It is ...
  4. Trade Surplus

    An economic measure of a positive balance of trade, where a country's ...
  5. J Curve

    A theory stating that a country's trade deficit will worsen initially ...
  6. Current Account Surplus

    A current account surplus is a positive current account balance, ...
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. 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.
  3. 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 that mean?
  4. 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.
  5. 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?
  6. Insights

    Can The U.S Close Its Trade Deficit?

    The stronger dollar could have increased the U.S. trade deficit. Instead, economic growth issues abroad and falling oil prices have helped shrink it.
  7. Trading

    Main Factors that Influence Exchange Rates

    The exchange rate is one of the most important determinants of a country's relative level of economic health and can impact your returns.
  8. Insights

    Interesting Facts About Imports and Exports

    Learn how imports and exports exert a profound influence on the consumer and the economy.
  9. Insights

    U.S. Trade Deficit Hits 5-year High in January

    Rising imports see trade deficit hit five-year high in January.
  10. Investing

    Why Money Flow From Japan Matters to the U.S. Equity Market

    Discover why Japanese savers and investors may have a lot to say about the future of the U.S. equity market, and why the trade deficit is responsible.
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 ... Read Answer >>
  2. Which countries run the largest budget deficits?

    Discover the countries with the largest budget deficits and what it means. Deficits are influenced by the economy and also ... Read Answer >>
  3. Understanding the Effects of Fiscal Deficits on an Economy

    Understand what fiscal deficits are and understand the real impact of budget deficits on the economy. Learn why government ... Read Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center