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What is a Trade Surplus?

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  • Written By: Marsha A. Tisdale
  • Edited By: Melissa Wiley
  • Last Modified Date: 04 December 2016
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Trade surplus is a condition in which a country has a positive balance of trade with other countries. Countries that enjoy a trade surplus have more money flowing in than out. This includes both money for the products the country exports and the money spent by foreign visitors to the country. When a nation has a trade surplus, it has more control over its own currency.

Exports include goods and services produced in a country and sold to one or more other countries. Country exports are of a higher value than imports. Balance of trade is the difference between the value of exports and imports within a specified period of time. A positive balance is a surplus, and a negative balance is a trade deficit.

A trade surplus indicates that there is more demand for the exports of a country than there is demand for foreign products and services. There is therefore a higher employment rate within the country and the standard of living is increased. Positive balance of trade plays an important role in the economic growth of any country.

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Trade surplus in goods and services not only influences the level of employment within a country, but it also affects the price level and inflation rate in its economy. As the demand for a country’s goods and services increase, producers increase their output to meet the increased demand. This in turn generates additional income that augments the growth of the country’s economy. When the economy grows, the output, or gross domestic product, increases and citizens can afford a more expensive lifestyle.

There are drawbacks to the increase in trade surplus. A rise in net exports will force production to meet foreign demand by increasing demand for labor and resource goods and services. Increased demand will increase the cost of wages and raw material, which increases the cost of production. This leads to raised retail prices of goods and services. Therefore, as the trade surplus increases so does inflation.

A trade deficit has a dampening effect on the economy in that it slows growth and increases unemployment as the demand for workers decreases. Whether a deficit has a negative or positive effect depends on whom is being affected. Increasing the foreign trade deficit, for example, can be good from the viewpoint of the individual consumer because he or she would end up paying lower prices for goods. Producers and wage earnings, however, would be adversely affected.

Another measure of trade surplus and trade deficit is how they relate to the business cycle within an economy. If a country finds itself in a strong expansion, one strategy is to import more and to provide more price competition. This limits inflation and provides a more varied supply of goods and services than is normally available. On the other hand, during a recession the economy would be better served by exporting more, thus creating more demand and more jobs.

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bluedolphin
Post 3

@ZipLine-- I'm not an economist but I'll try to explain.

A trade surplus means that a country exports more than imports, so it's selling a lot of domestic products. When other countries buy those products, they buy with the currency of that country.

So when the US is exporting a lot of goods, there is an inflow of US dollars into the US economy. This means that most US dollars in the world are under the control of the US. US is not going to sell its own currency, which will assure that the US dollar has good value in the global market. US will be able to buy more goods this way.

If a country imports

more than it exports, other countries will hold most of its currency and those countries can sell the currency whenever they want. If those countries decide to sell, this will cause the currency to lose value. So when that country wants to buy things from others, it's going to have to use more of its domestic currency to buy which is going to have negative affects on the economy.

That's why it's desirable to have a trade surplus, so that the domestic currency is valuable.

ZipLine
Post 2

What does control over currency mean? For example, when the United States has a trade surplus, why does it have more control over the US dollar?

ddljohn
Post 1

It seems like many developing countries have a hard time getting a trade surplus. They are usually experiencing a trade deficit.

A trade surplus is really great because this means that inflation and unemployment is low and prices are reasonable in a country. It's also an encouraging environment for foreign investment. A trade surplus shows that an economy is strong and growing.

The issue with many developing countries is that they are experiencing a negative trade balance. They export little, but import a lot. Prices are high, inflation is high, employment is not high enough. This is why development is slow.

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