Trade deficits are situations in which the imports of goods and services exceed the products exported by a specific country. While is it not unusual for nations with a very stable economy to experience a small amount of trade deficit from time to time, prolonged periods with a significant imbalance between exports and imports can create significant economic issues within the country. At the same time, a trade deficit may also weaken the currency of the country on the Forex market.
Under the best of circumstances, countries are able to maintain a balance between imports and exports. While the balance does not have to be completely equal, achieving what is known as a positive balance of trade is the goal. In this scenario, the amount of goods and services exported to other countries is slightly higher than products imported from other countries. A nation that consistently is able to export more than is imported tends to be very stable internally. At the same time, the currency of the country performs well on the foreign exchange market.
By contrast, a trade deficit where a significant difference between imports and exports exists indicates severe problems for a country. When a negative balance of trade is present and the exports are consistently lower than the imports, the economy of the country may experience some type of crisis. Inflation may rise significantly, creating financial hardship for the citizens. Along with internal economic difficulties, a severe trade deficit weakens confidence in the nation on the international front, which in turns leads to the currency of the country losing value in comparison to the currencies issued by other nations.
While a prolonged and significant trade deficit can create a number of economic problems, a small deficit from time to time is rarely a cause for alarm. However, even a small trade deficit should be monitored. If the deficit appears to be growing consistently, steps should be taken to counter the impact of the deficit and also attempt to bring the ratio between imports and exports back into an acceptable range.
