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What is Trade Deficit?

A trade deficit is an economic condition that occurs when a country is importing more goods than it is exporting. It is calculated by taking the value of goods being imported and subtracting it from the value of goods being exported. A country with a trade deficit imports more goods and services from other countries than it exports globally. If a country exports more goods and services than it imports, the country has a trade surplus.

Causes of Trade Deficit

  1. 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.
  2. 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 imported.

Impact of Trade Deficit

  1. Initially, it increases the standard of living, as residents have access to a large variety of products.
  2. If it persists, then the government needs to find more foreign exchange to bridge the gap, which leads to the weakening of the local currency.
  3. It makes it necessary for finding investors of foreign origin to reduce the import-export gap.
  4. A higher deficit leads to jobs being outsourced to foreign countries as more imports lead to fewer job opportunities.
  5. 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.

Trade Deficit

Advantages of Trade Deficit

  1. It allows a country to consume more than its production capacities.
  2. It helps nations to avoid any shortfall in goods.
  3. 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.
  4. It allows generating more foreign direct investment.

Disadvantages of Trade Deficit

  1. It is harmful to a developing country as more imports lead to deflation and increase the fiscal deficit.
  2. More jobs are outsourced, as domestic industries shrink with less demand when demand for foreign goods increases.
  3. 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.
  4. It leads to a decrease in the value of the local currency.