Is trade surplus always a good thing?

The data by the Commerce Ministry showed that India recorded trade surplus in June for the first time in 18 years. How?

The merchandise exports during the month contracted 12.4%, while imports tanked 47.6%, leading to a trade surplus of $790 million. The imports as well as exports have declined which means, that the fall in imports led to the surplus, not the rise in exports.

Balance of trade

Trade Balance = Total Value of Exports — Total Value of Imports.

That’s it. A simple formula to understand what balance of trade means. It is the difference between a country’s exports and imports over a certain period of time.

A trade surplus is an economic measure of a positive balance of trade, where a country’s exports exceed its imports. Vice versa, trade deficit occurs when a country imports more than it exports in terms of value.

Good or bad?

A trade surplus, especially in a pandemic time like this may sound like good news, it might not be though. One of the major reasons for importing goods from other countries is the rising demand in its home country. It also indicates that the people in the country have money to spend on the imported goods.

The trade balance also impacts currency exchange rates as supply as a country’s currency value fluctuates based on its product demand it has in the overseas market.

India is well-known for importing raw materials, capital/intermediate goods, and consumer goods. Therefore, a dip in import numbers state the fall in domestic consumer demand as well as production activities — not a good indication.

While China is known for producing and exporting products, it has undervalued its exchange rate in order to promote exports. Germany is another country that has had trade surplus for long, however, its growth concerning the value of exports has slowed over the past few years. In contrast, the value of U.S. dollar is high, favoring imports as opposed to exports and having a huge trade deficit.

Applying the same thought, trade deficits should not be always looked as a negative implication for a weak economy. Ongoing or rising manufacturing, consumption, demand, production activities, rising exports are the major indicators that drive the status of an economy.

Head to moneyguru’s Insight section to stay updated on all major financial news updates of the day!