Trade deficits are the difference between how much a country imports and how much it exports. When done right, they can let trading partners specialize in their strengths and create wealth for all consumers. Gone wrong, they can harm labor markets and create problems of savings and investment.

What is the primary cause for trade deficits?

The fundamental cause of a trade deficit is an imbalance between a country’s savings and investment rates. Financing that spending happens in the form of either borrowing from foreign lenders (which adds to the U.S. national debt) or foreign investing in U.S. assets and businesses—the capital account.

When does a country have a trade deficit?

A trade deficit happens when a country’s imports of goods and services exceed its exports of goods and services. In other words, when a country buys more from the rest of the world than it sells, the country incurs a trade deficit. In 2016, the U.S. trade deficit was about $500 billion.

How does a negative balance of trade affect the economy?

In the short run, a negative balance of trade curbs inflation. But over time, a substantial trade deficit weakens domestic industries and decreases job opportunities. A huge reliance on imports also leaves a country vulnerable to economic downturns.

How does the Bureau of economic analysis measure the trade deficit?

In the United States, the Bureau of Economic Analysis measures and defines the trade deficit. It defines U.S. imports as goods and services produced in a foreign country and bought by U.S. residents. It includes all goods shipped to the United States, even if they’re produced by an American-owned company.

Is the trade deficit a problem or a gift?

This does happen, in the form of “transfers,” or gifts. These can actually be quite substantial, in the form of official foreign aid, nonprofit contributions, or remittances from overseas family members. But, these are placed in a separate category.