Trade deficit of a country means its import for a period exceeds its export. Which means a trade deficit occurs when there is a negative balance in an international transaction.
For instance, suppose in the year 2022 a country has exported $ 3 trillion in goods and services while it imports $ 4 trillion, the net result is $ 1 trillion trade deficit of that country.
In other words, a country has spent more money than it has made in international trade with the rest of the world. Net balance determines the exposure of an economy to the rest of the world. It’s also known as negative balance of trade.
As per a report published, India’s trade deficit has widened to a record $31.02 billion in July 2022. Compared to last year’s July trade deficit of $ 10.63 billion, it’s a 3 times increase in India’s trade deficit.
A trade surplus is the opposite of a trade deficit. When a country’s export of goods and services exceeds its imports of goods and services, it has a trade surplus.
What causes a trade deficit?
A country might face a trade deficit when it lacks sufficient capacity to produce its own products. It can be due to lack of skills, resources or finances. It’s very difficult to pinpoint the exact cause of the trade deficit.
Here is a list of some of the causes of the trade deficit.
- Economic growth with domestic currency appreciation can enlarge the trade deficit. When the economy of a country grows consistently, consumers get more money in hand. Due to currency appreciation, they find foreign goods cheaper to buy, which increases the trade deficit.
- Certain goods can not be produced domestically due to lack of skills and other factors like technological superiority. Due to limitations in production, that country will be forced to buy goods from the rest of the world.
- Trade policies also have a major impact on the trade deficit.
Advantages of trade deficit
In trade deficit, a country consumes more than it produces. Due to this a country can avoid shortage of food and other economic problems.
If a country’s domestic currency is cheap, then imports become more expensive due to the trade deficit. Imported goods become costlier, as a result consumers will shift towards domestic goods.
Due to depreciation of domestic currency, a country’s export becomes less expensive and more competitive.
Disadvantages of trade deficit
In the long run, the trade deficit creates substantial problems.
Due to the trade deficit, foregin investors start investing their money by buying capital in existing businesses of the country. This increases productivity and jobs. However, in the long run, if the trade deficit continues, then these foreign investors will eventually own nearly all the businesses of the country.
A growing economy with stronger domestic currency often leads to a larger trade deficit. Due to growth in the economy and appreciation of domestic currency, goods from abroad become cheap, therefore consumers prefer to buy more foregin goods.
When a country imports more and exports less for a longer period of time, its unemployment increases, leading to job loss.
When the trade deficit increases, a country’s gross domestic production decreases.
