Trade is the amount by which the cost of the country’s imports surpasses or exceeds the value of its exports. A trade deficit represents an outflow of domestic currency to foreign markets.
Trade deficit usually has negative effects on the countries economy. The trade deficit is also known as the Negative Balance of trade. Currently, the countries that are facing trade deficit are the USA, Australia, United Kingdom, Mexico, and Brazil.
Trade deficit happens when a country fails to produce everything it requires and needs to import goods from foreign countries. For example, if a country exports goods worth 500 million dollars and imports goods of 650 million dollars then there is a trade deficit of 150 million dollars. Mathematically,
Trade Deficit = Total Value of Imports – Total Value of Exports
Although there are many disadvantages of trade deficit you cannot keep your eye away from the positive side of it. Here I try to list out some of the pros and cons of trade deficit.
Post Content - In Short
Pros of Trade Deficit
There will be unemployment at low levels even the country is facing a trade deficit whereas a high rate of unemployment may occur in countries with surpluses. This means employment opportunity is rarely affected by the trade deficit.
Improves the country’s standard
Resident’s of the trade deficit country have access to a wider variety of products and services for a more competitive price. Because of the lower price of commodities, the threat of inflation reduces since it creates lower price and improves people’s standard.
The surplus in the financial account and capital balances the trade deficit of the country. The foreign direct investment increases in country with a trade deficit. So trade deficit is not always disastrous to nations economy in the long run because in some form or another currency will always come back to the country, such as foreign investments.
Cons of Trade Deficit
Employment opportunity decreases
The domestic job opportunity decreases as the country faces a trade deficit. The main reason for reduced job opportunities is due to the fall in economic growth and stability of the nation. This happens when a trade deficit continues over a longer period of time. Also if the nation continues to buy goods from abroad and stop producing on its own job oppurtunity obviously decreases.
Reduction in Currency Value
As the trade deficit persists for a longer period of time which means if imports exceed the exports, the value of currency preferably lowers. In other words, a trade deficit indicates whether a country’s currency is strongly wanted or desired in the world market.
Depressing effect on wages
Trade deficits have also had an adverse effect on wages. Workers need to rely on services industries rather than production and sales industries where wages are much lower.