The Effects Of Balance Of Trade Surplus And Deficit On A Country's Economy

There is no doubt that balance of trade, which is sometimes symbolized as (NX), is described as the difference between the monetary value of export and import of output in an economy over a certain period. It could also be seen as the relationship between the nation’s imports and exports. When the balance has a positive indication, it is termed a trade surplus, i.e., exporting more than is imported, and a trade deficit or a trade gap if the reverse is the case. The Balance of trade is sometimes divided into a goods and a service balance. It encompasses the activity of exports and imports. It is expected that a country that does more exports than imports stands a big chance of enjoying a balance of trade surplus in its economy more than its counterpart who does the opposite.

Economists and Government bureaus attempt to track trade deficits and surpluses by recording as many transactions with foreign entities as possible. Economists and Statisticians collect receipts from custom offices and routinely total imports, exports, and financial transactions. The full accounting is called the ‘Balance of Payments’- this is used to calculate the balance of trade, which almost always results in a trade surplus or deficit.

Pre-Contemporary understanding of the balance of trade informed the economic policies of early modern Europe that are grouped under the heading ‘mercantilism.’

Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the state’s prosperity and military security. In particular, it demands a positive balance of trade. Its main purpose was to increase a nation’s wealth by imposing government regulation concerning all of the nation’s commercial interests. It was believed that national strength could be maximized by limiting imports via tariffs and maximizing export. It encouraged more exports and discouraged imports from gaining a trade balance advantage that would eventually culminate into a nation’s trade surplus. In fact, this has been the common practice of the western world. They were able to gain trade superiority over their colonies and third world countries such as Australia, Nigeria, Ghana, South Africa, and other countries in Africa and some parts of the world. This is still the main reason why they still enjoy many trade surplus benefits with these countries up to date. This has been made constantly predominant due to the lack of technical know-how and capacity to produce sufficient and durable up to standard goods by these countries, a situation where they solely rely on foreign goods to run their economy and most times, their moribund industries are seen relying on import to survive.

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What is Trade Surplus?

Trade Surplus can be defined as an economic measure of a positive balance of trade where a country’s export exceeds its imports. A trade surplus represents a net inflow of domestic currency from foreign markets and is the opposite of a trade deficit, representing a net outflow.

Investopedia further explained the concept of trade surplus when a nation has a trade surplus; it has control over most of its currency. This causes a reduction of risk for another nation selling this currency, which causes a drop in its value. When the currency loses value, it is more expensive to purchase imports, causing an even greater imbalance.

A Trade surplus usually creates a situation where the surplus only grows (due to the rise in the nation’s currency value, making imports cheaper). There are many arguments against Milton Freidman’s belief that trade imbalance will correct itself naturally.

What is Trade Deficit?

Trade Deficit can be seen as an economic measure of a negative balance of trade in which a country’s imports exceeds its export. It is simply the excess of imports over exports. As usual in Economics, there are several different trade deficit views, depending on who you talk to. They could be perceived as either good or bad or both immaterial depending on the situation. However, few economists argue that trade deficits are always good.

Economists who consider trade deficit to be bad believe that a nation that consistently runs a current account deficit is borrowing from abroad or selling off capital assets -long term assets-to finance current purchases of goods and services. They believe that continual borrowing is not a viable long term strategy and that selling long term assets to finance current consumption undermines future production.

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Economists who consider trade deficit good associate them with positive economic development, specifically, higher income, consumer confidence, and investment. They argue that a trade deficit enables the United States to import capital to invest in productive capacity. Far from hurting employment as may be earlier perceived. They also hold the view that a trade deficit financed by foreign investment in the United States helps to boost U.S employment.

Some Economists view the concept of the trade deficit as a mere expression of consumer preferences and as immaterial. These economists typically equate economic well being with rising consumption. If consumers want imported food, clothing, and cars, why shouldn’t they buy them? That range of Choices is seen as symptoms of a successful and dynamic economy.

Perhaps the best and most suitable view about the Trade deficit is the balanced view. If a trade deficit represents borrowing to finance current consumption rather than long term investment, or results from inflationary pressure, or erodes U.S employment, it isn’t good. If a trade deficit fosters borrowing to finance long-term investment or reflects rising incomes, confidence and investment-and don’t hurt employment-then it’s good. If a trade deficit merely expresses consumer preference rather than these phenomena, it should be treated as immaterial.