What is a good trade balance?
If the exports of a country exceed its imports, the country is said to have a favourable balance of trade, or a trade surplus. Conversely, if the imports exceed exports, an unfavourable balance of trade, or a trade deficit, exists.
A trade deficit occurs when a country's imports exceed its exports. A trade deficit is also referred to as a negative balance of trade (BOT). The balance can be calculated on different categories of transactions: goods (a.k.a., “merchandise”), services, goods and services.
The balance of trade is the official term for net exports that makes up the balance of payments. The balance of trade can be a “favorable” surplus (exports exceed imports) or an “unfavorable” deficit (imports exceed exports).
The trade balance is the difference between the value of exports of goods and services and the value of imports of goods and services. A trade deficit means that the country is importing more goods and services than it is exporting; a trade surplus means the opposite.
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.
A trade deficit is neither inherently entirely good or bad, although very large deficits can negatively impact the economy.
Key takeaways. A trade deficit occurs when one country imports more goods and services to its trading partner than it exports. Trade deficits are neither inherently good nor bad, but are complicated by a variety of economic factors. Investors should exercise prudence in their judgment about global trade.
Trade surpluses are no guarantee of economic health, and trade deficits are no guarantee of economic weakness. Either trade deficits or trade surpluses can work out well or poorly, depending on whether a government wisely invests the corresponding flows of financial capital.
According to the economic theory of mercantilism, which prevailed in Europe from the 16th to the 18th century, a favourable balance of trade was a necessary means of financing a country's purchase of foreign goods and maintaining its export trade.
By far the largest bilateral trade imbalance is with China. The United States ran a $419 billion goods deficit with China in 2018.
Is a high trade balance good?
In general, a trade surplus is seen as a positive sign for a country's economy, while a trade deficit is often seen as a negative sign. However, this is not always the case. A trade surplus or trade deficit is not inherently good nor bad. The balance of trade alone is not an indicator of economic health.
For example, a nation would have a $500,000 trade deficit if it had $1 million in exports and $1.5 million in imports. There are numerous factors that can impact the trade balance of a country such as the competitiveness of domestic firms, recessions in countries that are trading partners, and currency valuations.
High commodity prices can lead to increased export earnings and a favorable trade balance, while low prices can have the opposite effect.
A trade surplus is an economic measure of a positive balance of trade, where a country's exports exceed its imports. It is the opposite of a trade deficit.
Trade deficits are the difference between how much a country imports and how much it exports. When done right, they can let trading partners specialize in their strengths and create wealth for all consumers. Gone wrong, they can harm labor markets and create problems of savings and investment.
The most significant cause of the trade deficit is the low rate of U.S. domestic savings by households, firms, and the government relative to its investment needs. To make up for that shortfall, Americans must borrow from countries abroad (such as China) with excess savings.
A trade deficit has advantages and disadvantages. The advantages include ensuring the availability of goods for consumption for the residents of a country through sufficient imports. The disadvantages include pressure on the external payments and on the currency of a country.
This statistic shows the 20 countries with the highest trade balance deficit worldwide in 2022. In 2022, the United States reported the highest trade balance deficit with approximately 1.31 trillion U.S. dollars.
The U.S. goods and services trade deficit increased in February 2024 according to the U.S. Bureau of Economic Analysis and the U.S. Census Bureau. The deficit increased from $67.6 billion in January (revised) to $68.9 billion in February, as imports increased more than exports.
The US last had a trade surplus in 1975. However, recessions may cause short-run anomalies to rising trade deficits.
Why surplus is bad for economy?
Surplus causes a market disequilibrium in the supply and demand of a product. This imbalance means that the product cannot efficiently flow through the market. Fortunately, the cycle of surplus and shortage has a way of balancing itself out.
A trade deficit isn't necessarily a bad sign for an economy. On the contrary, a deficit could be a signal that a country's consumers are wealthy enough to purchase more goods than their country produces.
The current account and the capital account always must balance each other. This is because everything the U.S. imports must be paid for in some way, and the U.S. must receive payment for everything we export.
| Rank | Country | Percent of Total Trade |
|---|---|---|
| 1 | China | 16.9% |
| 2 | Canada | 14.8% |
| 3 | Mexico | 14.2% |
| 4 | Japan | 5.1% |
The balance of trade (which reflects higher or lower demand for a currency) can affect currency exchange rates. A country with a high demand for its goods tends to export more than it imports, increasing demand for its currency. A country that imports more than it exports will see less demand for its currency.
