Question

Would you worry about a trade deficit with one country? Why or why not? How would a trade deficit with the rest of the world be different?

Answer 1

When value of exports fall short of the value of imports,we have a trade deficit.

When we have trade deficit with one nation,there is no need to worry much . Following are the reasons

* The volume of deficit won't be really high compared to having a trade deficit with all countries.

* Special attention can be paid to do export promotion as well as well as import promotion as only one country is involved.

*The corrections of deficit won't take a long duration.

* Even the nation fails to recover from the trade deficit with this purticular country it can be balanced by having a trade deficit with another partner.

However having a trade deficit with the rest of the world is a completely different scenario.Correcting it will be a Herculean task.

* If country has persistent trade deficit,imports being greater than exports,it will lead to unemployment.

* There will be a fall in domestic production as the demand for Exports fall compared to demand for imports

*value of domestic currency will fall against foreign currencies

*It may have a negative impact on the interest rate.

*There will be adverse effects on the economic growth and stability.

* Recovery from this deficit will be a slow and gradual process.

However what we need to understand is the fact some amount of trade deficit is healthy for the economy especially for developing nations.As the country imports goods that might improve the productivity of its labour and capital ,production would increase and the deficit will be corrected. However when the trade deficit grows too high and becomes persistent,there will be serious repercussions .