What is Trade Surplus?
Trade Surplus can be defined as an Economic measure of a positive balance of Trade where a Country’s export exceeds its imports. A Trade Surplus represents a net inflow of domestic currency from foreign markets and is the opposite of a Trade Deficit, which would represent a net outflow.
Investopedia further explained the concept of Trade Surplus as when a nation has a Trade Surplus; it has control over the majority of its currency. This causes a reduction of risk for another nation selling this currency, which causes a drop in its value, when the currency loses value, it makes it more expensive to purchase imports, causing an even a greater imbalance.
A Trade Surplus usually creates a situation where the Surplus only grows (due to the rise in the value of the nation’s currency making imports cheaper). There are many arguments against Milton Freidman’s belief that Trade imbalance will correct themselves naturally.
What is Trade Deficit?
Trade Deficit can be seen as an Economic measure of negative balance of Trade in which a Country’s imports exceeds its export. It is simply the excess of imports over exports. As usual in Economics, there are several different views of Trade Deficit, depending on who you talk to. They could be perceived as either good or bad or both immaterial depending on the situation. However, few economists argue that Trade Deficits are always good.
Economists who consider Trade Deficit to be bad believes that a nation that consistently runs a current account Deficit is borrowing from abroad or selling off capital assets -long term assets-to finance current purchases of goods and services. They believe that continual borrowing is not a viable long term strategy, and that selling long term assets to finance current consumption undermines future production.