An extended trade deficit can adversely impact a country’s economy and its stock markets.
An economic condition that occurs when a country is importing more goods than it is exporting is called trade deficit. It is also referred to as net exports. A trade deficit is calculated by deducting value of goods being exported from the goods being imported by a country. It is mentioned in the currency that a particular country uses. For instance if India exports Rs 700 billion worth of goods and imports Rs 800 billion of goods, the trade deficit stands at Rs 100 billion. Recently, the US has imposed tariffs on China. Experts believe that it has been done to control its trade deficit with the country. The US can either increase its exports or reduce its imports in order to control the deficit with China, and it is using the tariff measures to slash the imports, Achin Goel of Bonanza of Bonanza Portfolio told FE Online.
However, it’s difficult to measure country’s net exports or net imports as it involves various accounts which measure different investment flows. The current accounts and the financial accounts are totalled to form the balance of payments figure. The financial accounts amount to total changes in foreign and domestic property ownership. A current account is to measure all the amounts which are involved in import and export of goods and services or any interest earned from foreign accounts or any monetary transaction between countries. Thereafter, the net of these amounts is entered into the balance of payments.
Impact on Sensex, Nifty
An extended trade deficit can adversely impact a country’s economy and its stock markets. A country with extended trade deficit means it’s into debt. The investors take notice of such financial parameters and also take note of plunge in spending on locally produced goods.This hurts domestic producers and their share prices. This reduces demand in the domestic stock markets and result in decline of market.