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.
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.