A trade deficit occurs when a country’s imports exceed its exports for a given period of time. This means there is more coming into the country (being bought) than there is going out (being sold).  As a result, the country owes more to other countries than is owed to it. Assume the small island of Yota has abundant resources.  It uses them to meet almost all of its citizen’s needs. It also uses its resources to build a factory to make surfboards.  This is the only good that Yota exports. The one resource Yota does not have is oil, and it needs oil to generate electricity for its citizens and the surfboard factory.  If Yota imports $1 million of oil in a year, but only exports $600,000 worth of surfboards, Yota will have a trade deficit of $400,000.  Note that the only way for Yota to have this trade deficit is if other countries are willing to allow Yota to borrow funds to finance the $400,000 deficit.  Trade deficits are not always a bad thing.  For instance, without a trade deficit, Yota would not be able to keep the surfboard factory operating and its workers employed. Having a trade deficit might also inspire Yota to take positive actions that would ultimately eliminate the deficit while benefiting the country.  For example, Yota’s government could encourage research and development in alternative energy to reduce its oil dependency.