Question

Moreover, what is the impact of trade surplus (exporting more than importing) and trade deficit (importing more than exporting) on GDP, employment, and the exchange rate of the country's currency?

Answer 1

Economic balance is one of the main components of the formula for a country's gross domestic product (GDP). GDP increases when there is a trade surplus: that is, the total value of the products and services sold abroad by domestic manufacturers exceeds the total value of foreign goods and services bought by domestic buyer. If domestic consumers are spending more on foreign goods than domestic producers are selling to foreign consumers-a trade deficit-then GDP will decline.

Export deficits and surpluses have an immediate effect on many key economic indicators, including crucial issues like the GDP. Such statistics must, however, be viewed in the sense of the total size of a nation. For example, the US may have a large trade deficit, but because most of its goods and services are domestically generated and consumed, this trade deficit has no major effect on its overall GDP.

Investors will also pay the most careful attention to the current account as a percentage of GDP, because it indicates the current account number compared to the total economic performance. To order to preserve global purchasing power, trade deficits should always be offset by an equivalent dollar sum of foreign direct investment. Unless the current account deficit does not balance out the gap as a percentage of GDP and FDI, a country may be heading for trouble.

Trade surpluses can be extremely important to watch while even driving economic growth in countries that depend on exports. For example, oil exporting countries can rely on trade surpluses to finance sovereign wealth funds or public programmes. Decreases in oil prices may lead to narrower trade surpluses and greater public-financial difficulties. And in some situations, these scenarios may lead to greater political risk in the regions affected.