Trade Deficit

Reviewed by Sweta | Updated on Aug 27, 2020

Introduction

Trade deficit refers to a situation where the country’s import dues exceed the receipts from the exports. Trade deficit arises in the course of international trade when the payments for imports exceed the receipts from export trade. A trade deficit is also referred to as a negative balance of trade.

Understanding Trade Deficit:

The calculation of trade deficit includes all types of transactions in international trade, such as export and import of goods and services, on both capital and current account. The capital account transactions include asset transfers, such as a sale or granting of trademark rights or grant of mining rights. The current account transactions include primary income and secondary income payments.

Primary income payments refer to income paid outside India, such as dividends, interest, or remittances on account of profits to foreign investors. It also includes remittances on account of any other returns on investments which move from resident and non-resident institutional units.

The secondary income refers to money flow between residents and non-residents. It includes individual or private remittances from India to other countries, pension payments made outside India, and government aid or grants outside India.

A trade deficit is also a reflection of the balance of payments. A balance of payments takes into account all transactions of international receipts and payments which are business to business, business to consumer, and by the government. The balance of payments situation indicates the state of a country’s economy to the rest of the world.

The current account transactions signify the consumption patterns of the residents of a country. A trade deficit can indicate that consumers have sufficient resources to purchase more goods in comparison to the goods produced and exported from the country. The capital account transactions indicate how the country is financed in terms of foreign currency loans and investments.

Advantages and Disadvantages

A trade deficit has advantages and disadvantages. The advantages include ensuring the availability of goods for consumption for the residents of a country through sufficient imports.

The disadvantages include pressure on the external payments and on the currency of a country. Governments of countries often alter import and export policies curbing imports or increasing import duties on certain goods. The government also encourages exports and consumption of indigenous goods.