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Learn the toughest concepts covered in your Macroeconomics class with step-by-step video tutorials and practice problems.

Introducing Economic Concepts

Introducing Concepts - Trade Deficit and Surplus


Trade Deficit and Trade Surplus

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Alright now let's introduce the concept of trade deficits and trade surplus. So when we talk about trading with other countries, we talk about economies that are open economies. So an open economy trades, it trades with it trades with other countries, it trades its goods and services for goods and services produced abroad. Okay. Uh compare that to a closed economy. A closed economy is a country that does not try, they do not trade with other countries. They're closed economy. Well generally we talk about open economies right? We're generally trading with other countries. Um So when we do trade with other countries, we're going to be exporting goods and importing goods and services when we export that's us selling things to other countries. So goods and services sold in other countries, those are exports. Right. You should probably be familiar with this term at least that when we export goods we sell them in other countries where imports, that's the opposite goods and services bought from other countries. So they're they're produced in the other country and they're purchased and sold here in our country, right here in the U. S. Something like that. So what do we talk about a trade surplus or a trade deficit? While it comes down to the exports and imports the level of exports and the level of imports? When do you think we have a trade surplus? Is it when the exports are higher or the imports are higher? It's when the exports are higher, right? We're selling more to other countries and we're buying in from our countries, we have a surplus of our trade, We're selling more than we're purchasing. That's a surplus there, compare that to a trade deficit. That's the opposite where those exports were not selling as much as we're purchasing from other countries were more dependent on the other countries for our our consumption. Right? So exports are less than the imports when we have a trade deficit. So if we look here on this graph, we've got a few different countries um that we're gonna label here. The first one here is the U. S. A. So the U. S. A. Notice the level of imports and exports. We've got our legend up here, we are running a trade surplus or deficit. What do you see the imports are the imports are greater. Right? We purchase a lot from other countries namely china. Um and that causes us to run a trade deficit. So let's look at some other countries here. This next one is Germany. And what do they have? Are they running a trade surplus or deficit? They have a surplus, right? They're exporting more than they're importing next is china. I noticed the level um the level of their exports is that it almost matches our level of imports here in the USa doesn't mean that all the exports of china are going to the usa. They export all around the world, but they are also running a trade surplus, right? Their exports are greater than their imports. And finally we have Saudi Arabia here notice how their trade is a lot smaller, but they've got a big gap there between their exports and imports. Um, and obviously most of their exports comes from gasoline, petrol. So there we go, we've got a few different countries there. Now, obviously the USA is not the only country in the world running a trade deficit, but we have been consistently running a trade deficit for a while. Now. Now when you see trade deficit, you think, oh, no, trade deficit, it sounds like such a bad thing. It's trade deficit, bad trade surplus. Good. The answer is really, it depends, it really depends. It depends. It doesn't really mean one thing or another. We have to think about one when it comes to international trade, why is there international trade? We've discussed this in other videos. It comes up in micro economics, it comes up here in macro economics as well. Well, international trade is a result of comparative advantage. Comparative advantage. See if I can squeeze it all in here. There we go. Comparative advantage. And remember comparative advantage means that you produce what you're good at producing, right? What you have a lower opportunity cost of producing. That's what you produce and you trade with the rest of the world. So that is the real measure of why we export and import the trade deficits and trade surpluses, they change over time. However, the determinant of the balance of why there's a, uh, increase, uh, an increase in exports or a decrease in imports or the balance between the two, it comes from saving and investment. So current consumption, when we talk about savings, that means current consumption is less than current output. So if we're saving, that means that our current consumption is less than the output. So if you think about the U. S. Economy, well, we're consuming more when it comes to this trade deficit, right? We're importing a lot, we're consuming things from other companies uh from other countries more than what we're producing and exporting or producing ourselves. Right? So we can think that we're generally in a situation we're not saving as much here, right? We are consuming more in the current based on these these trade levels compare that with investment. So investment, this is a little different than savings. Uh The idea of investment is where we're taking current resources, what we have now and we're devoting them to increasing future output. Okay, so we might have talked about this before. Um but some of you are seeing this for this first time. So, investment, this is where we're taking current resources and devoting them to increasing future output. What does that mean? So it means similar to savings where we're reducing current consumption. However, we're taking that reduction of consumption and we're investing it into the future to increase the future, uh the future consumption, the future output leading to future consumption. Well, when we talk about investment generally in your head, you're generally gonna think of financial investments which are generally what you think of. When you hear investment, you think of things like stocks and bonds, mutual funds, those type of things. Those are financial investments. However, when we talk about investments in this class, we're generally talking about economic investment and economic investment, that's things like factories, machinery, right? Things that are increasing our future output, things we purchased today, like we build a factory today. Well, that's not going to increase output today. That's gonna increase output in the future when we're using the factory or even R. And D. Research and development. Or were developing new technologies that are going to increase our future production. Make us more productive later. Alright, so for now we're gonna leave it on this high level. Um But what you want to know is that a trade deficit or trade surplus does not necessarily mean, oh, a trade surplus? That this economy is really stronger. Trade deficit. This economy is really struggling. Um It's not exactly correlated. We're gonna get into this topic a lot more later videos, But this is just kind of an introduction of the topic of savings, investments. Um Trade deficits and surplus, That whole idea. Cool. So let's take a pause here and let's move on to the next video