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
- 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 imported.
Impact of Trade Deficit
- Initially, it increases the standard of living, as residents have access to a large variety of products.
- 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.
- It makes it necessary for finding investors of foreign origin to reduce the import-export gap.
- A higher 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
- 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
- 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.
- It leads to a decrease in the value of the local currency.