ECONOMICS

Trade surplus and deficit: Definition and Meaning

Trade surplus and deficit 

Trade surplus is a situation where a country’s exports exceed the number of imports, and the deficit is when imports exceed exports. These are terms used in international trade and in the balance of payments, which an accounting record of the transactions of a country with the rest of the world.

If the balance of payments indicates that there is a surplus, it’s positive for the economy because it indicates a solid production and capacity to be self-sufficient. If the result is deficit, it indicates a high level of dependence on goods and services produced by other countries, or poor exploitation of the productive capacity of the country in question.

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Trade surplus or external surplus

The term surplus means the excess of something necessary, in economics and finance is when income exceeds expenses.

Trade surplus, also called external surplus, is the situation that occurs when more is exported than what is imported. Trade surplus is something positive for a country because it’s an indication of a good production and performance in international trade and as well as a strong economy that is able to supply itself.

Trade deficit or external deficit

Trade deficit is the opposite of trade surplus and consists of the situation in which imports exceed exports. A trade deficit is neither inherently entirely good or bad, but when it’s very large, it can  can negatively impact the economy. (1)

The balance of payments

The balance of payment is an accounting record that summarizes the transactions of the residents of a nation with the other nations of the world in a period that is usually one year. It also includes donations and transfers, and includes the sources and use of a country’s foreign exchange.

A transaction that generates foreign currency into the country is a credit and is recorded as a positive entry, but when payments in a foreign currency are required, it’s a debit and is recorded as a negative entry.

See also: The balance of payment

See also