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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.

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  4. Net Exports

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