Trade Deficit

Quick Summary of Trade Deficit

A trade deficit is when imports exceed exports.

Knowing the size of a country’s trade deficit tells us something fundamental (and seemingly simple). It is selling fewer goods and services to people outside its borders than it is buying from foreign countries. It’s more complex than counting (and bemoaning) the number of Japanese-produced Walkmans (remember those?) on Maple Street, U.S.A. Not everyone considers having a trade deficit bad; more just a product of economic cycles.

A trade deficit has to be looked at by sector and by country to understand what it says about a specific country’s economy.

For instance, all else being equal:

• If the price of oil drops, then the U.S. trade deficit would drop correspondingly, as the country would be spending less to get the same amount of this major import.
• If Country AA exports large amounts of those cute sweaters for dogs, a worldwide economic slowdown in which people stop buying frivolities would mean a declined demand for those sweaters, and thus an increase in trade imbalance.
• On the flip side, if Country BB exports large amounts of baby blankets, a worldwide surge in pregnancies would decrease its trade deficit.
• If Country XX can’t meet the demands of its own people, then it must import more and thus increase its trade deficit. Exchange rates could have the same effect if it becomes cheaper for Country XX to import items.

It’s also important to consider trade deficits on a country-to-country basis:

• Are imports and exports terribly out of balance between Country AA and Country BB, but almost even between Country AA and Country CC? What does that say about the interconnectedness and dependency between countries?

Having a trade deficit is not necessarily a bad thing. It may indicate growing wealth within a country if its citizens suddenly want and can afford lots of foreign goods. On the other side of this, if other countries aren’t wealthy, they can’t afford U.S. goods.

Information on the U.S. trade deficit can be found at the website of the Department of Commerce’s Bureau of Economic Analysis.

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