Note 12-- trade deficit

Trade deficit occurs when the value of imports exceeds the value of export.

It is always seen as a negative situation because it will cause:

1)People may choose to comsume more import goods because of an inflation which may be harmful for the economic growth as import is a leakage while export is an injection.

2)It may caused by an high exchange rate which may reduces the trade between this country and others.

3)Decreasing demand for domestic goods may reduce the investment and increase the unemployment.

However,it can be positive that:

1)More imports may mean that domestic income is increasing that people' s demand for all goods is rising whereas income overseas may be relative low.

2)It may caused by high exchange rate which can mean that more foreigh people trust the country and save more as high interest rate.

If we want to reduce the deficit,we can use devaluation,deflation and import control.

We can use the J-curve to show the influence of devaluation. When the currency is decreased initially,the net export will reduce from A-B as well. But after a long time,net export will increase because export is cheap and foreign country will consume more.

From the BBC News,the trade deficit fell to the lowest level narrowed by 9.7% to $36 bn as export hasn't fallen sharply as import.