What is a Trade Deficit?

Definition: A Trade Deficit is a situation in which there’s a negative difference in the trade balance. It simply means that a country is importing more than what it is exporting.

What Does Trade Deficit Mean?

In economics, a trade balance means the relationship between the amount of goods that a country purchases from another country and the amount of goods it sells to that country. You can think of it like the balance of goods coming in and goods going out. This balance can either be neutral, negative or positive. A deficit in this balance means that what a country is buying from others is more than what others are buying from it. This situation can have many different causes like low diversification of the economy, a reduction in market prices of the main goods produced by the country or a hostile legislation towards private business activity, among others.

By having a trade deficit, the country will have a greater outflow of foreign currency; a situation that might endangers the economic stability if the trade deficit keeps increasing. This trade balance can be extracted from the Balance of Payments report, normally issued by the country’s Central Bank or another top financial government authority.

In the U.S. trade balances are calculated and reported by the Bureau of Economic Analysis.

Here’s an illustration of this concept.

Example

Let’s suppose that Chile only produces cooper and Mexico only produces Iron. They are both trading between each other and Chile imported $30,000 worth of Iron from Mexico, while Mexico only imported $15,000 worth of cooper from Chile. In this case, who has a trade deficit in this relationship?

Basically, as the definition states, a trade deficit is a situation in which there’s a negative difference in the trade balance. In this scenario, Chile is importing more ($30,000) than what it is exporting ($15,000), this means that they have a trade deficit of -$15,000. Of course this is a basic, non-realistic example. But it shows where the deficit comes from.