Trade Deficits and its Impacts on Economy

The trade deficit is a term used to denote the situation when the number of imports of a country is greater than its export. Usually, the trade deficit is seen as an unhealthy indicator for the economy. Various areas of the economy are impacted due to trade deficits. It is not just about borrowing a large number of goods and services from other countries but its impact is crucial on trade, foreign reserves, currency value, etc of a country. Mostly, countries seek to sell more instead of purchasing more from other economies to save foreign reserves that matter a lot to the economy. The various impacts of trade deficits are:

  • When a greater amount of goods and services are imported on an international scale, foreign reserves move out of the economy which is, obviously, not good for the economy.
  • It is important for the economy to sell more and more. It shows that the economy of the country has more surpluses of goods and services; that means the economy is doing well.
  • Trade deficits force countries to seek for debt in order to service the trade payments with other countries. Debt rises.
  • Trade deficits gradually decrease the ability of a country to stay competitive in the international market and the country becomes more dependent on other economies.