BENEFITS AND DRAWBACKS OF TRADE DEFICIT
Trade deficit is either be beneficial or detrimental to an economy, depending on the circumstances revolving the country. Negative balance of trade occurs when imports exceed exports. According to the CIA World Factbook, the United States holds the biggest trade deficit, with a trade imbalance of more than $460 trillion as of 2015.
How does trade deficit affect an economy?
The demand for exports affects the currency value of a country. Companies that sell products abroad must convert those foreign currencies back into their domestic currency to pay their workers and compensate their suppliers. As the demand for exports declines in relation to imports, the currency’s value should slump. In theory, such deficits should be automatically corrected through rate movements in the currency market in case of a floating exchange rate. On the other hand, a trade deficit indicates a country’s currency is desired in the global market.
Foreign Direct Investment
A trade deficit must be zero, to be offset by a surplus in the nation’s capital and financial accounts. Meaning countries have a considerable amount of foreign direct investments and foreign ownership of government debt. This could be deleterious for small nations though since a huge part of their assets and resources are owned by foreign investors who have the discretion to use or disburse such assets and resources. Nobel laureate Milton Friedman once trade deficits are not adverse in the long stretch as the currency will always find its way back to the country in one way or another.
The aftermath of trade deficit is predictable especially when a country experiences it in the long run. In the event imports are higher than exports, local jobs may be lost to other nations. High unemployment may emerge in a country with trade surplus. Conversely, unemployment may touch its lowest level in a nation with trade deficit.
Oftentimes, a persistent trade deficit could affect a country negatively. It can pull the currency’s value down or make the prices of products denominated in that currency more costly. In simplest terms: inflation. Now, to counter inflation, the central bank may implement tougher monetary policies such as cutting money supply.
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Benefits and Drawbacks of Trade Deficit
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