What is a Trade Deficit?
A Trade Deficit describes a country with a negative trade balance, wherein the total value of the country’s net imports exceeds the total value of its exports to other countries.
How Does a Trade Deficit Work in Economics?
A country in a trade deficit is importing more goods than they are exporting, so there are more purchases being made from other countries than sales to other countries.
In economics, a country’s balance of trade, or “trade balance”, can be determined by comparing the dollar value of the country’s imports to its exports.
- Imports → The total value of the products the country buys from other countries
- Exports → The total value of the products the country sells to other countries
The formula for calculating a country’s current balance of trade takes the value of a country’s imports and subtracts that figure from the value of its exports.
The trade balance formula is as follows.
If the trade balance is negative — i.e. the country is in a trade deficit — the total value of the country’s imports exceeds the total value of its exports.
- Trade Deficit → Imports > Exports (Negative Trade Balance)
The near-term and long-term effects of a trade deficit are usually viewed as having a negative impact on the country’s economic health.
For instance, deficits are associated with reduced demand for the country’s goods, which directly causes the value of its currency to decline relative to the currencies of other countries.
If a country’s imports exceed its exports over the long run, the country’s trade deficit can see its currency become devalued in the global markets as a result of the reduced demand.
Most countries in a trade deficit will attempt to cut the deficit by undergoing initiatives to increase export volume while decreasing import volume.
The Wharton Online & Wall Street Prep Applied Value Investing Certificate Program
Learn how institutional investors identify high-potential undervalued stocks. Enrollment is open for the Feb. 10 - Apr. 6 cohort.
Enroll TodayTrade Deficit vs. Trade Surplus: What is the Difference?
The opposite of a trade deficit is referred to as a “trade surplus”, where the balance of trade is positive instead of negative.
If a country is in a trade surplus, the total value of the country’s imports exceeds its exports, i.e. more selling to other countries than purchases from other countries.
- Trade Surplus → Exports > Imports (Positive Trade Balance)
Generally, a trade surplus is preferable over a trade deficit, since a trade surplus is frequently associated with the country’s currency value rising given the increased demand for the country’s goods.
Unlike a trade deficit, a trade surplus can result in the country’s currency becoming more valuable considering its goods are in higher demand overseas.
While the specific context must be considered, trade surpluses typically contribute to greater economic output (i.e. volume of sales to other countries), higher employment rates, and a more positive outlook on economic growth.
U.S. Trade Deficit Example: Exports vs. Imports with China
The U.S. government receives widespread criticism for its trade deficit, especially around the concern of the U.S. economy’s growing reliance on China.
The U.S. Census Bureau and the U.S. Bureau of Economic Analysis recently announced on August 4, 2022 that the U.S. deficit for goods and services was $79.6 billion in June 2022.
The deficit in June was an improvement from what it had been in May, declining by $5.3 billion from $84.9 billion in the prior month.
- U.S. Exports, June 2022 = $260.8 billion
- U.S. Imports, June 2022 = $340.4 billion
By subtracting the value of the imports in June from the value of the exports, we can calculate the trade deficit in June as $79.6 billion.
- U.S. Trade Deficit, June 2022 = $340.4 billion – $260.8 billion = $79.6 billion
US International Trade in Goods and Services, June 2022 (Source: U.S. Census Bureau)
