What is a trade deficit?

A country with a healthy economy will have more exports than imports.

Trade deficits are situations in which imports of goods and services exceed the products exported by a given country. While it is not uncommon for nations with a very stable economy to experience a small trade deficit from time to time, prolonged periods with a significant imbalance between exports and imports can create significant economic problems within the country. At the same time, a trade deficit can also weaken the country’s currency on the Forex market.

At best, countries manage to maintain a balance between imports and exports. While the balance doesn’t have to be completely equal, the goal is to achieve what’s known as a positive trade balance. In this scenario, the quantity of goods and services exported to other countries is slightly higher than the products imported from other countries. A nation that is able to consistently export more than it imports tends to be very stable domestically. At the same time, the country’s currency performs well in the foreign exchange market.

In contrast, a trade deficit where there is a significant difference between imports and exports indicates serious problems for a country. When there is a negative trade balance and exports are consistently lower than imports, the country’s economy may experience some kind of crisis. Inflation can increase significantly, creating financial hardship for citizens. Along with domestic economic difficulties, a severe trade deficit weakens the country’s confidence on the international stage, which in turn causes the country’s currency to lose value against currencies issued by other nations.

While a prolonged and significant trade deficit can create a host of economic problems, a small deficit every now and then is rarely a cause for alarm. However, even a small trade deficit must be monitored. If the deficit appears to be growing consistently, measures must be taken to contain the impact of the deficit and also try to bring the ratio of imports to exports back into an acceptable range.

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