Trade Deficit

Lesson

A trade deficit occurs when a country imports more goods and services than it exports. This can affect the exchange rate, employment, and economic growth.

Practice Question #1

What is a trade deficit?

Terms

Trade deficit:

The difference between a country's imports and exports when imports exceed exports.

Imports:

Goods and services purchased from other countries.

Exports:

Goods and services sold to other countries.

Balance of trade:

The difference between a country's exports and imports.

Current account:

A measure of a country's international trade in goods, services, and investment income.

Practice Question #2

Which of the following factors can be affected by a trade deficit?

Do Not Confuse With

Trade surplus:

The opposite of a trade deficit, when a country exports more goods and services than it imports.

Fiscal deficit:

The difference between government spending and revenue.

Practice Question #3

What is the opposite of a trade deficit?

Historical Example

In the 1980s, a major industrialized country experienced a significant trade deficit due to a strong currency and high domestic consumption. This led to decreased exports and increased imports, causing the trade deficit to widen. Eventually, the country implemented policies to reduce the trade deficit, such as encouraging domestic production and reducing imports.

Real-World Example

A small island nation relies heavily on tourism and imports most of its goods, including food and fuel. Due to a decline in tourism and an increase in global oil prices, the country experiences a trade deficit. This leads to a decrease in the value of its currency, making imports more expensive and further worsening the trade deficit.