Learn all about trade deficits and surpluses in just a few minutes! Professor Jadrian Wooten of Penn State University explains trade deficits and surpluses and how they impact trading countries.
A country's balance of trade may be said to be in deficit or surplus, depending on whether the country imports more than it exports.
A nation's international trading activity is made up of both imports and exports. It can be determined whether a country is primarily a buyer or a seller based on the value of its exports relative to the value of its imports. This is done by calculating net exports, which is the value of the goods and services a nation exports minus the value of the foreign goods and services it imports. This is also known as the nation's balance of trade. A country in which more money is made through exports than is spent on imports is said to be running a trade surplus; in this case, the net exports would be positive. A country in which more money is spent on imports than it makes through exports is said to be running a trade deficit; in this case, the net exports would be negative. If a country made the same amount of money on exports as they spent on imports, the country is said to have balanced trade. A nation that exports more than it imports is a net exporter, while a nation that imports more than it exports is a net importer.
Deficits and surpluses are expressed as a figure in the nation's respective currency. For instance, in the United States in 1975, there was a trade surplus of $12,404 million. This means the United States sold more through exports than spent on imports. However, 1975 is the most recent year in U.S. history that there has been a trade surplus. Many economists guess it will be the last time because the U.S. dollar is very strong, leading to high demand for international goods.
The U.S. experienced a trade surplus in the 1960s and '70s, when it made more money on exports than it spent on imports. Since then, the country has experienced a trade deficit, in which it spends more money on imports than it makes on exports.
Trade deficits and surpluses are an important indicator of a country's economic health, and they are components of vital measures such as GDP. Whether a trade deficit or surplus is viewed positively or negatively depends greatly on the general situation of the country concerned. The United States is a major exporter on the world market, but imports outweigh American exports. The United States runs a trade deficit; however, the extent to which this impacts the GDP of the United States is limited, because most goods produced in the United States are consumed domestically. Other countries, especially those that produce and export valuable natural resources such as oil and minerals, may run large trade surpluses and use their exports as the engine of their economic growth. For instance, in 2012, the trade surplus of the United Arab Emirates (UAE), fueled by oil sales, reached 520,300 million AED (UAE dirham, the nation's currency). This can be a risky strategy because it renders the nation's wider economy vulnerable to price fluctuations in the main commodity traded. An oil-exporting country may find its healthy trade surplus all but wiped out with a sudden drop in the price of oil. This can have disastrous societal consequences, especially if the exports were funding wider social and economic programs.
