What is a Trade Deficit?
When the value of a country's imports exceeds the value of its exports, the resulting negative number is called a trade deficit.
How Does a Trade Deficit Work?
Balance of trade (BOT is a component of a country's as is calculated for a particular period (usually a quarter or a year). In the United States, the Bureau of Economic Analysis calculates the BOT.
For example, if the value of imported items to the United States equaled $1 trillion last year, but the value of exported items from the United States equaled $750 billion, then the United States would have a negative $250 billion , or a $250 billion trade deficit.
Why Does a Trade Deficit Matter?
Countries have various methods for calculating economists and understand the strength of a country's economy in relation to other countries. For example, a country with a large trade deficit is essentially borrowing to purchase goods and services, but a country with a large trade surplus is essentially doing the opposite. In some cases, the BOT correlates with the country's political stability because it is indicative of the level of foreign occurring there.
As mentioned, the BOT is part of the , which is actually composed of three subaccounts in the United States: the current account, the capital account, and the financial account, each of which have their own types of inflows and outflows. The BOT is part of the current account, which is composed of merchandise trade, services, income receipts, and one-way transfers such as foreign aid.