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"Always sell what shows you a loss and keep what shows you a profit."
Reminiscences of a Stock Operator
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Trade Deficit is an excess of imports over exports. Trade Surplus is an excess of exports over imports. More accurately, the all-encompassing term is Balance of Trade -- a Surplus or a Deficit. The Balance of Trade is made up of transactions in merchandise and other movable goods.
Factors that influence the Balance of Trade:
- Strength or Weakness of a Country's Currency: e.g., if the U.S. dollar is very strong compared to Mexico, the Balance of Trade with Mexico has a bias toward imports. That leads to a Trade Deficit.
- Production Advantages: e.g., if Japan has more modern production techniques that the U.S., the Balance of Trade with Japan has a bias toward imports. That leads to a Trade Deficit.
These are simple examples of the dynamics of Trade Deficit. When you consider that the growth of many large companies is tied to exports and sales to foreign countries, you can readily see that the Balance of Trade gives you some indication of potential profit problems for these companies.
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