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Trade Surplus

Updated on April 25, 2024
Article bySusmita Pathak
Reviewed byDheeraj Vaidya, CFA, FRM

Trade Surplus Definition

A trade surplus is a financial term used when an economy exports more than imports. While it may lead to economic and employment growth within a nation, it can also result in increased product prices and interest rates that could affect the domestic currency value in the foreign markets.

what is trade surplus

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A trade surplus is the inverse of a trade deficitTrade DeficitWhen the total sum of goods or services that a country imports from other countries is higher than the total sum of goods or services that a country exports to other countries, this is referred to as a trade deficit, which is the opposite of the balance of trade theory.read more, implying that an economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more‘s imports exceed its exports. In the case of the former, the country’s currency inflow from global markets increases, strengthening the regional economy. On the other hand, the latter indicates an increase in local currency outflow, weakening the country’s overall economy.

Key Takeaways

  • The trade surplus in finance refers to an economy that records more export value than its import value, and it indicates the economic and employment growth within a nation.
  • It happens when the trade balance result is positive, whereas a trade deficit occurs when imports exceed exports, and hence the effect is negative.
  • This economic growth indicator indicates that the inflow of local currency and resources is more than the outflow, which is in all aspects a positive signal for any economy.
  • It causes interest rates on loans and demand and the prices of manufactured goods to rise. The rate of increase in exports affects currency exchange rates directly.

Understanding Trade Surplus

The trade surplus is a growth indicator that signifies the upliftment of any economy. It is also known as the positive trade balanceTrade BalanceThe balance of trade (BOT) is the country’s exports minus its imports. BOT is one of the significant components for any current economic asset as it measures a country’s net income earned on global investments.read more and is calculated as the difference between an economy’s export value and import value. It occurs when the outcome is positive, whereas a trade deficit occurs when the result is negative. The Bureau of Economic Analysis offers information on the United States’ trade balances.

Trade Surplus Benefits

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In this case, the revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more earned through exports exceeds the cost of importing goods from other countries. When exports increase, manufacturing improves. As a result, the number of laborers required grows as the volume of products supplied to another country increases. The growing demand for a human workforce, in turn, boosts employment rates as more and more people in the economy are employed in various industries based on their areas of expertise.

As more individuals earn money, it leads to a rise in interest rates on loans, demand, and the prices of goods produced. The increase in exports directly impacts currency exchange rates, making it better than the nations indicating a trade deficit. For example, if a country records more exports than what it imports from other nations, it implies that it is growing economically.

As the trade balance has such a large impact on the currency value, it is suggested to use pegged currency as a solution. It will maintain the exchange rate of a particular currency constant in relation to another currency.

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Example

Let us consider the following trade surplus example to understand the concept better and see how export can help build and strengthen international relations.

The relationship between China and Australia deteriorated during the COVID-19 pandemic. The latter backed a call for a global investigation of how the former handled the coronavirus outbreak at first. This heightened tensions between the two countries, prompting China to impose bans and limits on Australian exports of barley, wine, beef, coal, and cotton and levy taxes.

However, Australia’s trade surplus with China increased by 24% yearly to 180 billion Australian dollars in 2021. The export value witnessed a monthly increase of 19.4 billion Australian dollars in July, 72% more than 2020.

Is Trade Surplus Good Or Bad?

Trade surplus signifies a positive trade balance that indicates economic progress. It results from the difference between the revenue earned from exports and the expenditure incurred from imports. It suggests that local currency and resources inflow exceeds the outflow, which indicates a healthy economy. As a result, unlike a trade deficit, achieving a surplus is always desirable for any country.

However, this economic growthEconomic GrowthEconomic growth refers to an increase in the aggregated production and market value of economic commodities and services in an economy over a specific period.read more indicator can be damaging if governments start interfering with trade by using protectionism – an endeavor to defend domestic industries. Thus, countries impose import tariffs and subsidiesSubsidiesA subsidy in economics refers to direct or indirect financial assistance from the government to an individual, household, business, or institution to promote social and economic policies.read more. It, in turn, compels other countries to act similarly, making exports harder for the former. Furthermore, imposing tariffs raises the cost of goods in those economies and has a detrimental impact on international relations.

Frequently Asked Questions (FAQs)

What does trade surplus mean?

The trade surplus is a financial term that defines the economic status whose export value is more than its import value. It is a growth measure that indicates an economy’s improvement. It is also called a positive trade balance and computed as the positive difference between the export and import values.

What are the benefits of trade surplus?

The trade surplus benefits are as follows:
– Allows two or more countries to purchase goods from each other
– Creates more job opportunities
– Leads to the economic growth of a nation
– Improves creditworthiness of an economy

What is the difference between trade surplus and trade deficit?

A trade surplus occurs when an economy’s exports are more than its imports. As a result, the country’s currency inflow from international markets rises, bolstering the regional economy in the first situation. On the other hand, a trade deficit occurs when an economy’s import value exceeds the value of its exports. It implies a rise in local currency outflow, which weakens the country’s overall economy.

This has been a guide to Trade Surplus and its definition. Here we explain how trade surplus works along with example and whether is it good or bad. You can learn more from the following articles –

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Comments

  1. Masroor Mustafa daheri says

    Excellent

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