Trade deficit definition

A trade deficit occurs when a country’s imports is higher than its exports.

Trade deficit formula

The trade deficit reflects an economy that is a net debtor to the rest of the world. The economy with a trade deficit is consuming or investing more resources that it is saving. These resources are provided by the other economies who are exporting resources to this country.

A trade deficit is not necessarily problematic. It all depends on how the specific country is using the extra resources provided by the rest of the world. If the economy imports capital goods to increase its investments in order to produce more future investment income then a trade deficit is productive. If however, the trade deficit is a result of increased consumer goods imports which are used to finance increased domestic consumption this is a problematic sign.

The trade balance is one of the components of the current account balance. A trade deficit moreover, can be counterbalanced by the country’s net income from abroad or net current transfers to create a positive current account balance.

US Trade deficit

The US has one of the largest trade deficits in the world. Since 1980, the United states is importing much more than its exporting. The United States current account deficit is $109.8 billion one of the largest worldwide. The trade deficit is one of the components of the current account balance