Trade Deficit and Trade Surplus

01 Sep 2022 Trade Deficit and Trade Surplus

News: India’s trade deficit has widened to a record $31.02 billion in July thanks to contracting merchandise exports and a rise in imports. This is a three-times increase from the $10.63 billion trade deficit reported in July last year.

GS Paper 3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

What is the Balance of Trade (BOT)?

• Difference between the monetary value of a country’s imports and exports over a given time period is known as  balance of trade (BOT) or trade balance.
• BOT plays an important role in determining a country’s current account.
• Balance of Trade = Value of Exports – Value of Imports, where Value of Exports is the value of goods and services that are sold to buyers in other countries and Value of Imports is the value of goods and services that are bought from sellers in other countries.

What is the trade deficit?

• Gap between exports and imports is  trade deficit or negative balance of trade (BOT).  
• Trade deficit occurs when money spent on imports exceeds that spent on exports in a country.
• Trade deficit can be calculated for different goods and services and also for international transactions. 

Factors responsible for trade deficit:

• Trade deficit is mostly due to import as some goods are not being produced domestically leading to imbalance in their trade. 
• Another factor is when trade became expensive due to weak currency.

What is the impact of the trade deficit on a country’s economy?

• Increase in trade deficit will leads to decrease in a country’s GDP .
• In many instances local currency’s value got decreased due to  higher trade deficit.
• According to economists, trade deficit also lead to an increase in unemployment as more imports than exports impact the jobs market.
• Example: If more mobiles are imported and less produced locally, then there will be less local jobs in that sector.

What is the trade surplus?

• Opposite of a trade deficit is Trade surplus. It reflects a net foreign-market inflow of domestic currency.
• In case of  positive trade balance  the exports of a nation outweigh its imports and it is an economic indicator of a trade surplus. 
•  By reducing the total value of imports from the total value of exports we can arrive at Trade balance.
• Trade surplus exists when  the value of the trade balance is positive.

What is the importance of Trade Surplus in Country’s economy?

• In many situations, a trade surplus tends to influence currency exchange rates and  boost the currency of a country relative to other currencies. However, this also depends on the proportion of a country’s goods and services as compared to other countries, as well as other market factors.
• Creation of employment and economic growth happens due to trade surplus.
• Trade surplus influences prices and interest rates. It can also lead to higher prices and interest rates. 
• The trade balance of a nation allows a country to export most of its currency through trade. 

Sources: Indian Express; Corporate Finance Institute

Source Links:

1. Indian Express: https://bit.ly/3TVvmYM
2. Corporate Finance Institute: https://bit.ly/3BpBr8H

Yojna IAS Daily current affairs eng med 1st Sep

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