a country’s balance of trade will ref lect either a surplus or deficit. If a trade deficit is shown, it signifies that imports exceed that country’s exports.
There are more ways of measuring a country’s f iscal health, but the trade account is often an enlightening one. It is here that vital indicators, such as the country’s current account, external debt, exports and imports and balance of trade are ref lected. It is the latter, the balance of trade, which will indicate either a surplus or deficit, that is often a revealing indictor.
To further complicate matters, the current account deficit and trade deficit are often addressed as one and the same, however, there is a difference. While a trade balance describes the difference in value between exports and imports, the current account (used as a broad measure of the trade balance) is the trade balance plus the amounts received for locally owned items or production used abroad.
What a current account deficit essentially tells us is that the total imports of goods and services are greater than the country’s exports, resulting in the country incurring debt. This, however, does not necessarily raise a red f lag. In fact, many First-World countries run deficits as this allows them to concentrate on development and innovation while outsourcing production. Emerging-market countries also run deficits to allow for growth in local productivity with a view of future gains from exports. This in turn should then have a positive effect on the trade balance and assist in bringing the deficit down.
A trade deficit is a negative balance of trade − think of this as being in the red. It means that a country’s imports exceed it s exports, creating an outf l ow of domestic currency to foreign markets. Countries that are unable to produce all the goods they need often suffer from a trade deficit.
At the other end of the spectrum is the trade surplus or positive balance of trade (in accounting speak: being in the black; a good thing). In this scenario, a country’s exports exceed its i mports allowing for an inf low of cash from foreign markets. A country with a trade surplus has far more control over the health of its own currency, as it is unlikel y to be affected by global sel l i ng. Exchange rates are a critical factor on any country’s trading platform and a low exchange rate is a major factor to increasing the balance of trade.
Why, you may ask, do many FirstWorld countries also have a trade deficit? To draw an analogy, it’s similar to that credit card you have: revolving credit – using someone else’s money to be able to do the things you want or need to do, now. So, having a deficit does not necessarily mean you are the runt of the litter, but the higher your negative current account balance is, as a percentage of GDP, it may put you in this category.
The latest balance of trade f igures for South Africa is cause to sit up and take notice. SARS reported a trade deficit of over R19bn in August 2013, up by nearly R6bn from July’s figures, and climbing steadily towards SA’s all-time high f igure of R24.5bn posted in January of this year. Even more concerning is the short turnaround time (less than three years) from a healthy surplus of R10bn posted in December 2010. The latest trade deficit figure is attributed mainly to a fall in exports as well as an increase in imports. Overall, exports were down by 7.6% with