Trade Deficit: Definition, Benefits & Effects

Instructor: Brianna Whiting
In this lesson we will explore trade deficit. Specifically, we will define the term and discuss the benefits and effects. The lesson will then conclude with a summary and quiz.

A First Look at Trade Deficit

Meet Sara! Sara is the owner of Lovely Lounge Chairs. As the summer was fast approaching, Sara knew that she must check to see if she had enough inventory on hand to meet the needs of her customers. After a quick check, Sara realized that she sold 250 lounge chairs last summer and anticipates similar sales this year. So, Sara ordered enough to sell 250 lounge chairs again this summer. Unfortunately, when the summer came to an end, Sara realized that she had only sold 100 lounge chairs. This means that the number of lounge chairs ordered exceeded the number of lounge chairs sold. When a situation like this happens in the world of trade, we have what is known as a Trade Deficit.

Trade Deficit Further Defined

You may be wondering what trade deficit really is. Well, trade deficit is when a country is importing, or receiving, more goods then it is exporting, or sending out. When this happens, a negative balance of trade occurs. Let's look at an example to better explain this concept. Let's say the United States imports 350 million dollars' worth of goods. At the same time it exports only 250 million dollars' worth of goods. This would mean that there is a trade deficit of 100 million dollars.


So, what happens when a country experiences a trade deficit? Well, there are many effects of a trade deficit. Some of them are beneficial to the country, while others have a negative effect. Let's start with the negative effects:

1. Job outsourcing- This happens when more goods are bought from other countries, or imported, instead of being purchased from domestic businesses. This then leads to domestic businesses going out of business and jobs decreasing domestically. Instead, the countries that are now receiving a demand for their goods start to hire more workers. For example, if the U.S. decides to purchase most of its shoes from China, domestic shoe companies will begin to lose business. When this happens, American shoe manufacturers will have to cut employees because they are not making enough local sales. In China, however, more jobs are being created in order to meet the demand for the shoes they are exporting to the U.S.

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