CandleFocus Glossary Editor
A trade surplus occurs when a country’s exports are greater than its imports. This results in the country generating a net inflow of foreign currency. The resulting increase in foreign reserves strengthens the value of the country’s currency and the economy itself. This is in contrast to a trade deficit, which occurs when a country’s imports are larger than its exports, resulting in a net outflow of foreign currency.
The driving force behind a country having a trade surplus is the ability to produce and export goods or services more efficiently and for less money than other countries, raising the value of its currency and keeping prices of its exports competitive. Since earnings from a trade surplus finance imported resources and services, a country running a surplus can potentially become economically self-sufficient.
The majority of the world’s largest economies are likely to experience occasional, mild trade surpluses. The U.S. experienced a trade surplus prior to the mid-1980s, when the Financial Services Modernization Act of 1999 (also known as the Gramm-Leach-Bliley Act) allowed firms to merge banks, insurance companies, and investment firms. The resulting deregulation of the financial sector and stronger competition between investment firms led to an increase in the trade deficit.
In essence, a trade surplus benefits a country by increasing its foreign currency reserves, strengthening its currency, and driving down the cost of imported goods, making them more affordable for the population. However, a large, chronic trade surplus can cause an economy to become too reliant on imports, with an imbalance created between domestic and international products. Furthermore, when an economy runs a trade surplus for too long, it can cause a rapid appreciation of its currency, which further makes imported goods more expensive and exports less attractive.
All in all, trade surpluses can have a positive effect on an economy, providing a boost to employment and economic growth. However, if these conditions persist for too long, or the surplus becomes excessive, the economy may be subject to a number of other issues that can ultimately hurt the country.
The driving force behind a country having a trade surplus is the ability to produce and export goods or services more efficiently and for less money than other countries, raising the value of its currency and keeping prices of its exports competitive. Since earnings from a trade surplus finance imported resources and services, a country running a surplus can potentially become economically self-sufficient.
The majority of the world’s largest economies are likely to experience occasional, mild trade surpluses. The U.S. experienced a trade surplus prior to the mid-1980s, when the Financial Services Modernization Act of 1999 (also known as the Gramm-Leach-Bliley Act) allowed firms to merge banks, insurance companies, and investment firms. The resulting deregulation of the financial sector and stronger competition between investment firms led to an increase in the trade deficit.
In essence, a trade surplus benefits a country by increasing its foreign currency reserves, strengthening its currency, and driving down the cost of imported goods, making them more affordable for the population. However, a large, chronic trade surplus can cause an economy to become too reliant on imports, with an imbalance created between domestic and international products. Furthermore, when an economy runs a trade surplus for too long, it can cause a rapid appreciation of its currency, which further makes imported goods more expensive and exports less attractive.
All in all, trade surpluses can have a positive effect on an economy, providing a boost to employment and economic growth. However, if these conditions persist for too long, or the surplus becomes excessive, the economy may be subject to a number of other issues that can ultimately hurt the country.