Trade deficit

Context

India’s trade deficit has widened to a record $31.02 billion in July thanks to contracting merchandise exports and a rise in imports. 

• This is a three-time increase from the $10.63 billion trade deficit reported in July last year.
  

What is the trade deficit?

• Simply put, the trade deficit or negative balance of trade (BOT) is the gap between exports and imports. 
• When money spent on imports exceeds that spent on exports in a country, a trade deficit occurs.
• It can be calculated for different goods and services and also for international transactions. 
• The opposite of a trade deficit is trade surplus.
  

Causes

• There are multiple factors that can be responsible. 
  • One of them is some goods not being produced domestically. 
    • In that case, they have to be imported. 
    • This leads to an imbalance in their trade. 
    • A weak currency can also be a cause as it makes trade expensive.

Impacts

• If the trade deficit increases, a country’s GDP decreases. 
• A higher trade deficit can decrease the local currency’s value.
• More imports than exports, impact the jobs market and lead to an increase in unemployment. 
• If more mobiles are imported and less produced locally, then there will be less local jobs in that sector.
• Initially, it increases the standard of living, as residents have access to large varieties of products.
• If the trade deficit persists, then the government needs to find more foreign exchange to bridge the gap, which leads to the weakening of the local currency.
• A higher trade deficit leads to jobs being outsourced to foreign countries as more imports lead to fewer job opportunities.
• Demand for imported goods leads to a decline in demand for locally made goods, which leads to the closing of factories and the associated job losses.