Question

Under what circumstances the trade deficit is really bad and under what circumstances the trade deficit is not too bad? Explain.

Answer 1

A trade deficit occurs when a country export is less than its import. it means now country wealth is moving away from the country.

Trade deficit could be bad or not too bad:

Bad deficit: Rising trade deficit during low economic growth suggests that the economy is losing its competitiveness in the export or import is rising. But such import or trade deficit is not adding in the efforts to drive up the overall growth rate of the economy. trade deficit might be a result of manipulated actions of the trading partners. Further, deficit caused by the import of unproductive goods would also be bad.

No too bad: The trade deficit accompanied by the high economic growth and import of productive items, would not be too bad. Such trade deficit is sustainable as country keeps clicking the right amount of growth rate.