Trade Deficit – Why is it a problem?
October 15, 2016
This is a useful video for students that find the topic International Trade challenging.
AD = C + I + G + (X-M)
When the import expenditure of a country exceeds the export revenue, a trade deficit occurs.
As a result of a fall in the (X-M), i.e the net export revenue, there will be a fall in an economy’s Aggregate Demand (AD). Eventually, the economy will experience a fall in the Real National Income, and a slow/negative economic growth. Firms will also find that they are unable to sell off all their goods, and thereby reduce production. This will cause a fall in the derived demand for labour, causing demand-deficient (cyclical) unemployment in the country to rise.
There are many more negative consequences of a trade deficit. Watch the video to find out more!