Economics
Trade Deficit and Surplus
A trade deficit occurs when a country imports more goods and services than it exports, leading to a negative balance of trade. Conversely, a trade surplus occurs when a country exports more than it imports, resulting in a positive balance of trade. These terms are important indicators of a country's economic health and its relationship with other nations.
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11 Key excerpts on "Trade Deficit and Surplus"
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
23.5 The Pros and Cons of Trade Deficits and Surpluses 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. 576 23 • Key Terms Access for free at openstax.org 23.6 The Difference between Level of Trade and the Trade Balance There is a difference between the level of a country’s trade and the balance of trade. The government measures its level of trade by the percentage of exports out of GDP, or the size of the economy. Small economies that have nearby trading partners and a history of international trade will tend to have higher levels of trade. Larger economies with few nearby trading partners and a limited history of international trade will tend to have lower levels of trade. The level of trade is different from the trade balance. The level of trade depends on a country’s history of trade, its geography, and the size of its economy. A country’s balance of trade is the dollar difference between its exports and imports. Trade deficits and trade surpluses are not necessarily good or bad—it depends on the circumstances. Even if a country is borrowing, if it invests that money in productivity-boosting investments it can lead to an improvement in long-term economic growth. Self-Check Questions 1. If foreign investors buy more U.S. stocks and bonds, how would that show up in the current account balance? 2. If the trade deficit of the United States increases, how is the current account balance affected? 3. State whether each of the following events involves a financial flow to the Mexican economy or a financial flow out of the Mexican economy: a. Mexico imports services from Japan b. Mexico exports goods to Canada c. U.S. investors receive a return from past financial investments in Mexico 4.
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
10.5 The Pros and Cons of Trade Deficits and Surpluses 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. 266 10 • Key Terms Access for free at openstax.org 10.6 The Difference between Level of Trade and the Trade Balance There is a difference between the level of a country’s trade and the balance of trade. The government measures its level of trade by the percentage of exports out of GDP, or the size of the economy. Small economies that have nearby trading partners and a history of international trade will tend to have higher levels of trade. Larger economies with few nearby trading partners and a limited history of international trade will tend to have lower levels of trade. The level of trade is different from the trade balance. The level of trade depends on a country’s history of trade, its geography, and the size of its economy. A country’s balance of trade is the dollar difference between its exports and imports. Trade deficits and trade surpluses are not necessarily good or bad—it depends on the circumstances. Even if a country is borrowing, if it invests that money in productivity-boosting investments it can lead to an improvement in long-term economic growth. Self-Check Questions 1. If foreign investors buy more U.S. stocks and bonds, how would that show up in the current account balance? 2. If the trade deficit of the United States increases, how is the current account balance affected? 3. State whether each of the following events involves a financial flow to the Mexican economy or a financial flow out of the Mexican economy: a. Mexico imports services from Japan b. Mexico exports goods to Canada c. U.S. investors receive a return from past financial investments in Mexico 4.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2014(Publication Date)
- Openstax(Publisher)
252 Chapter 10 | The International Trade and Capital Flows This OpenStax book is available for free at http://cnx.org/content/col11626/1.10 10.5 The Pros and Cons of Trade Deficits and Surpluses 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 the corresponding flows of financial capital are wisely invested. 10.6 The Difference between Level of Trade and the Trade Balance There is a difference between the level of a country’s trade and the balance of trade. The level of trade is measured by the percentage of exports out of GDP, or the size of the economy. Small economies that have nearby trading partners and a history of international trade will tend to have higher levels of trade. Larger economies with few nearby trading partners and a limited history of international trade will tend to have lower levels of trade. The level of trade is different from the trade balance. The level of trade depends on a country’s history of trade, its geography, and the size of its economy. A country’s balance of trade is the dollar difference between its exports and imports. Trade deficits and trade surpluses are not necessarily good or bad—it depends on the circumstances. Even if a country is borrowing, if that money is invested in productivity-boosting investments it can lead to an improvement in long- term economic growth. SELF-CHECK QUESTIONS 1. If foreign investors buy more U.S. stocks and bonds, how would that show up in the current account balance? 2. If the trade deficit of the United States increases, how is the current account balance affected? 3. State whether each of the following events involves a financial flow to the Mexican economy or a financial flow out of the Mexican economy: a. Mexico imports services from Japan b. Mexico exports goods to Canada c.
eBook - PDF- John McLaren(Author)
- 2012(Publication Date)
- Wiley(Publisher)
Bush (recall footnote 3)—appear to be the result of simple economic confusion. In sum, if one believes (as some do and some do not) that the United States is suffering from a market failure that is leading to insufficient savings, then that implies that the current trade deficit is indeed excessively high. In this case, government action to lower the trade deficit directly, such as the Buffett proposal, may well improve welfare. But this is attacking the symptom, while the ideal solution would be to target the alleged savings problem directly. M A I N I D E A S 1. The trade deficit is the value of a country’s imports minus the value of its exports. The trade surplus is the value of a country’s exports minus the value of its imports. A country’s trade is balanced if the value of its exports is equal to the value of its imports. 2. In a static model of trade, trade must be balanced in equilibrium because of the budget constraint, unless there are international transfers of wealth or income. 3. In the period right after World War II, European economies ran large trade deficits while the U.S. economy ran surpluses. In the last two decades, those roles have been reversed. European trade on the whole has tended to be fairly balanced, while the U.S. economy has been running gigantic, unprecedented trade deficits. 4. If we interpret the trade deficit as “foreign sav- ings,” then national accounting identities imply that domestic savings (public and private) plus foreign savings must equal domestic investment. This helps in interpreting a given change in the trade deficit. 5. A country may run a trade deficit as an optimal response to a temporary adverse shock (such as Europe in the aftermath of World War II) or an improvement in growth prospects (such as South Korea in the 1960s to the 1980s). In these cases, efforts to “cure” the deficit would be harmful.
- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Final Thoughts about Trade Balances Trade deficits can be a good or a bad sign for an economy, and trade surpluses can be a good or a bad sign. Even a trade balance of zero—which just means that a nation is neither a net borrower nor lender in the international economy—can be either a good or bad sign. The fundamental economic question is not whether a nation’s economy is borrowing or lending at all, but whether the particular borrowing or lending in the particular economic conditions of that country makes sense. It is interesting to reflect on how public attitudes toward trade deficits and surpluses might change if we could somehow change the labels that people and the news media affix to them. If we called a trade deficit “attracting foreign financial capital”—which accurately describes what a trade deficit means—then trade deficits might look more attractive. Conversely, if we called a trade surplus “shipping financial capital abroad”—which accurately captures what a trade surplus does—then trade surpluses might look less attractive. Either way, the key to understanding trade balances is to understand the relationships between flows of trade and flows of international payments, and what these relationships imply about the causes, benefits, and risks of different kinds of trade balances. The first step along this journey of understanding is to move beyond knee-jerk reactions to terms like “trade surplus,” 236 Chapter 9 | The International Trade and Capital Flows This OpenStax book is available for free at http://cnx.org/content/col23729/1.3 “trade balance,” and “trade deficit.” More than Meets the Eye in the Congo Now that you see the big picture, you undoubtedly realize that all of the economic choices you make, such as depositing savings or investing in an international mutual fund, do influence the flow of goods and services as well as the flows of money around the world.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Final Thoughts about Trade Balances Trade deficits can be a good or a bad sign for an economy, and trade surpluses can be a good or a bad sign. Even a trade balance of zero—which just means that a nation is neither a net borrower nor lender in the international economy—can be either a good or bad sign. The fundamental economic question is not whether a nation’s economy is borrowing or lending at all, but whether the particular borrowing or lending in the particular economic conditions of that country makes sense. It is interesting to reflect on how public attitudes toward trade deficits and surpluses might change if we could somehow change the labels that people and the news media affix to them. If we called a trade deficit “attracting foreign financial capital”—which accurately describes what a trade deficit means—then trade deficits might look more attractive. Conversely, if we called a trade surplus “shipping financial capital abroad”—which accurately captures what a trade surplus does—then trade surpluses might look less attractive. Either way, the key to understanding trade balances is to understand the relationships between flows of trade and flows of international payments, and what these relationships imply about the causes, benefits, and risks of different kinds of trade balances. The first step along this journey of understanding is to move beyond knee-jerk reactions to terms like “trade surplus,” 572 Chapter 23 | The International Trade and Capital Flows This OpenStax book is available for free at http://cnx.org/content/col12122/1.4 “trade balance,” and “trade deficit.” More than Meets the Eye in the Congo Now that you see the big picture, you undoubtedly realize that all of the economic choices you make, such as depositing savings or investing in an international mutual fund, do influence the flow of goods and services as well as the flows of money around the world.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Final Thoughts about Trade Balances Trade deficits can be a good or a bad sign for an economy, and trade surpluses can be a good or a bad sign. Even a trade balance of zero—which just means that a nation is neither a net borrower nor lender in the international economy—can be either a good or bad sign. The fundamental economic question is not whether a nation’s economy is borrowing or lending at all, but whether the particular borrowing or lending in the particular economic conditions of that country makes sense. It is interesting to reflect on how public attitudes toward trade deficits and surpluses might change if we could somehow change the labels that people and the news media affix to them. If we called a trade deficit “attracting foreign financial capital”—which accurately describes what a trade deficit means—then trade deficits might look more attractive. Conversely, if we called a trade surplus “shipping financial capital abroad”—which accurately captures what a trade surplus does—then trade surpluses might look less attractive. Either way, the key to understanding trade balances is to understand the relationships between flows of trade and flows of international payments, and what these relationships imply about the causes, benefits, and risks of different kinds of trade balances. The first step along this journey of understanding is to move beyond knee-jerk reactions to terms like “trade surplus,” 262 Chapter 10 | The International Trade and Capital Flows This OpenStax book is available for free at http://cnx.org/content/col12190/1.4 “trade balance,” and “trade deficit.” More than Meets the Eye in the Congo Now that you see the big picture, you undoubtedly realize that all of the economic choices you make, such as depositing savings or investing in an international mutual fund, do influence the flow of goods and services as well as the flows of money around the world.
- Rafael Reuveny, William R. Thompson, William R. Thompson, Rafael Reuveny, William R. Thompson, Rafael Reuveny(Authors)
- 2009(Publication Date)
- Wiley-Blackwell(Publisher)
For example, trade deficits have been widely linked to currency crashes (Kaminsky et al. 1997; Demirguc-Kunt & Detragiache 1998; Milesi-Ferretti & Razin 1998), in the aftermath of which governments are nearly twice as likely to fall (Cooper 1971; Frankel 2005). A deficit carries important signaling information to international financial institutions and investors, thus driving the behavior of agents that possess significant power to shape economic and political outcomes. Current account deficit countries tend to have higher real interest rates, by roughly 20 to 30 basis points for each 1 percent of GDP in deficit (Obstfeld & Rogoff 2000; IMF 2005b: 117). Higher interest rates constrain growth even as domestic production and employment falls victim to competitive pressure from imports. Deficit countries suffer exchange rate declines that limit purchasing power for essential imports, but adverse supply and demand elasticities do not usually permit the trade deficit to decline as a result. Trade deficits are thus authentic causal determinants in their own right, playing a critical role in the development of poor nations, both as a direct influence on the macro economy and as a significant constraint on national planning that channels foreign dependence and biases policy choices. Trade deficits place pressure on governments to do things they would not other-wise do. 17 Some may compromise growth, such as the tax incentives and subsidies which are used to attract foreign investment but then also diminish the benefit of that investment which occurs (Aitken & Harrison 1999). Others may be beyond the capacity of governments – especially the kinds of governments that experience high trade deficits in the South. Without adequate government regulation and without strong private financial institutions, volatile capital flows may be quite destabilizing.
eBook - PDFTrading Economics
A Guide to Economic Statistics for Practitioners and Students
- Trevor Williams, Victoria Turton(Authors)
- 2014(Publication Date)
- Wiley(Publisher)
The reverse is also true. If a country is doing well and it is running a current account surplus, its currency will tend to appreciate (though this applies to free-floating currencies, not to ones that are fixed by their government). This is because, if it is accumulating surpluses, it does not need to borrow, which means that it is paying less in interest, so people are less likely to invest in it and there is no need for it to borrow to fund a deficit. And, of course, because the current account is in surplus, Global Trade Statistics 199 they have to invest overseas to achieve balance according to accounting convention – in other words, a negative on their capital and financial account. This impact on the exchange rate obviously has implications for dif-ferent industrial sectors within the economy. We can break this down to analyse, for example, the effect on areas within manufacturing, such as food and drink and pharmaceuticals, and on the intangible elements of the economy, such as tourism and transfers. A currency that appreciates quickly, of course, can also generate inflation. If, as a country, you have a high export content in your GDP and you have to import a lot of goods in order to help to produce the goods you are exporting, then a sharply lower exchange rate can push up your inflation rate and eventually maybe lead to lower exports if it raises the price of the goods you are selling overseas. The question that needs to be uppermost for the financial market trader is this: how large is a country’s surplus or deficit relative to the size of its economy and, therefore, how sustainable is it in the short and long term? The answer will encompass an insight into what it means for those industries that drive an economy, in terms of their competitiveness and their ability to attract investment for growth.
- James E. Meade(Author)
- 2013(Publication Date)
- Routledge(Publisher)
CHAPTER VII
A Balance-of- Trade Deficit and the Rate of Exchange in Conditions of Free Trade
WE shall now turn from a consideration of Commercial Policy and shall assume once more that there is a free trade policy in both countries, A and B. But we no longer assume that the balance of trade of each country is zero. Our purpose in this section will be (a) to show how a balance-of-trade deficit or surplus can be represented on our geometric diagrams and (b) to consider the relationship, in a free trade world, between the size of the balance-of-trade deficit or surplus and the rate of exchange and barter terms of trade.In considering the rate of exchange we shall make the same assumptions about internal monetary policies as we have previously made. In country A the monetary and fiscal authorities take steps to inflate the general level of domestic expenditure of money on goods and services whenever the price of A-exportables in terms of A’s currency falls, and to deflate domestic expenditure in A whenever the price of A-exportables rises in terms of A’s currency. Thus the demand price for A-exportables is fixed in terms of A’s currency. Behind this fixed point, a free competitive market for A-exportables and B-exportables in A results in a price for B-exportables in terms of A’s currency which will just clear the market in A for both commodities; and a free competitive market for labour causes the money wage-rate in A to rise (or to fall) when the demand for labour exceeds (or falls short of) the supply, so that full employment is maintained.A similar monetary policy is adopted in B. The price of B-exportables in terms of B’s currency is maintained constant by a suitable reflationary or disinflationary policy of domestic expenditure in B; and the price of A-exportables and of B’s labour in terms of B’s currency then adjust themselves to this fixed price of B-exportables so that the markets for both commodities and for labour in B are just cleared.
eBook - PDFInternational Economics
Global Markets and International Competition
- Henry Thompson(Author)
- 2000(Publication Date)
- WSPC(Publisher)
INTRODUCTION This page is intentionally left blank Chapter Preview This chapter introduces some fundamental concepts: • International markets, supply and demand from different countries • Excess supply and excess demand, the international market model • Comparative advantage, the foundation of international trade • Balance of trade, net receipts from trade in goods INTRODUCTION The most important tools of economics are market supply and demand. A market is any place or mechanism in which goods and services are traded. Markets determine prices both in nominal currency terms and relative to one another. Markets include the corner convenience store, the stock market, the market for brain surgeons, the foreign exchange market, a neighborhood lemonade stand, the international market for steel. In market transactions, money changes hands between buyer and seller at an agreed price. An international transaction arises when the buyer and seller are in different countries. International markets involve economic agents in different countries. Two currencies are typically involved in an international transaction. The buyer's currency and the seller's currency must be exchanged. Another fact that distinguishes international economics is that governments can easily tax transactions with tariffs or limit transactions with quotas or nontariff barriers. International economics is also characterized by the lack of labor mobility between countries. Workers can move within a country with relative ease, but international migration is more difficult and typically restricted by law. Investment is also inhibited across national boundaries. Comparative advantage is one of the cornerstones of economics. Comparative advantage, a relative advantage in production efficiency, is the fundamental cause of international trade. The principle of comparative advantage rests on the important idea of opportunity costs. The opportunity cost of an action is the value of its next best alternative.
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