Trade deficit is said to take place when the imports done by a country exceed that of the exports done by a country in a fiscal year. The trade deficit is also termed as the negative balance of trade.
Trade deficit is a way of measuring the extent to which international trade is happening between the countries of the world.
Trade deficit can be calculated for different types and categories of goods and services and for international transactions such as current account, financial account and capital account.
Trade deficit is said to occur when there is a negative balance in an international transaction account. These international accounts like balance of payments keep track of all the transactions of monetary nature between the residents and non-residents.
Causes of Trade Deficit
The causes of trade deficit are as follows:
- When a country does not produce everything, it needs and imports products from other countries and pays import taxes, it causes a trade deficit. This is known as the current action deficit.
- It can also occur when companies are involved in the manufacturing of products in a foreign country. The raw materials required for manufacturing are exports, while the finished goods imported to the country are imports.
Impact of Trade Deficit
The impacts of the trade deficit are as follows:
- Initially, it increases the standard of living, as residents have access to large varieties of products.
- If the trade deficit persists, then the government needs to find more foreign exchange to bridge the gap, which leads to the weakening of the local currency.
- A higher trade deficit makes it necessary for finding investors of foreign origin to reduce the import-export gap.
- A higher trade deficit leads to jobs being outsourced to foreign countries as more imports lead to fewer job opportunities.
- Demand for imported goods leads to a decline in demand for locally made goods, which leads to the closing of factories and the associated job losses.
Advantages of Trade Deficit
The advantages of having the trade deficit are as follows:
- It allows a country to consume more than its production capacities.
- It helps nations to avoid any shortfall in goods.
- It provides the countries with a comparative advantage when such countries are involved in the trade. It is beneficial as a whole for increasing global wealth.
- It allows generating more foreign direct investment
Disadvantages of Trade Deficit
The disadvantages of the trade deficit are as follows:
- It is harmful to a developing country as more imports lead to deflation and increase the fiscal deficit.
- More jobs are outsourced, as domestic industries shrink with less demand when demand for foreign goods increases.
- In the form of attracting foreign investment due to the trade deficit, the country may end up providing ownership of its resources and assets to the foreign country.
- A higher trade deficit leads to a decrease in the value of the local currency.
This article is about the trade deficit, which is one of the metrics of measuring the economic growth of a nation, along with the GDP. To read more about such interesting concepts, stay connected to BYJU’S.