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In short, it is quite possible for nations with a relatively low level of trade, expressed as a percentage of GDP, to have relatively large trade deficits. It is also quite possible for nations with a near balance between exports and imports to worry about the consequences of high levels of trade for the economy. It is not inconsistent to believe that a high level of trade is potentially beneficial to an economy, because of the way it allows nations to play to their comparative advantages, and to also be concerned about any macroeconomic instability caused by a long-term pattern of large trade deficits. The following Clear It Up feature discusses how this sort of dynamic played out in Colonial India.

Are trade surpluses always beneficial? considering colonial india.

India was formally under British rule from 1858 to 1947. During that time, India consistently had trade surpluses with Great Britain. Anyone who believes that trade surpluses are a sign of economic strength and dominance while trade deficits are a sign of economic weakness must find this pattern odd, since it would mean that colonial India was successfully dominating and exploiting Great Britain for almost a century—which was not true.

Instead, India’s trade surpluses with Great Britain meant that each year there was an overall flow of financial capital from India to Great Britain. In India, this flow of financial capital was heavily criticized as the “drain,” and eliminating the drain of financial capital was viewed as one of the many reasons why India would benefit from achieving independence.

Final thoughts about trade balances

Trade deficits can be a good or a bad sign for an economy, and trade surpluses can be a good or a bad sign. Even a trade balance of zero—which just means that a nation is neither a net borrower nor lender in the international economy—can be either a good or bad sign. The fundamental economic question is not whether a nation’s economy is borrowing or lending at all, but whether the particular borrowing or lending in the particular economic conditions of that country makes sense.

It is interesting to reflect on how public attitudes toward trade deficits and surpluses might change if we could somehow change the labels that people and the news media affix to them. If a trade deficit was called “attracting foreign financial capital”—which accurately describes what a trade deficit means—then trade deficits might look more attractive. Conversely, if a trade surplus were called “shipping financial capital abroad”—which accurately captures what a trade surplus does—then trade surpluses might look less attractive. Either way, the key to understanding trade balances is to understand the relationships between flows of trade and flows of international payments, and what these relationships imply about the causes, benefits, and risks of different kinds of trade balances. The first step along this journey of understanding is to move beyond knee-jerk reactions to terms like “trade surplus,” “trade balance,” and “trade deficit.”

More than meets the eye in the congo

Now that you see the big picture, you undoubtedly realize that all of the economic choices you make, such as depositing savings or investing in an international mutual fund, do influence the flow of goods and services as well as the flows of money around the world.

You now know that a trade surplus does not necessarily tell us whether an economy is doing well or not. The Democratic Republic of Congo ran a trade surplus in 2013, as we learned in the beginning of the chapter. Yet its current account balance was –$2.8 billion. However, the return of political stability and the rebuilding in the aftermath of the civil war there has meant a flow of investment and financial capital into the country. In this case, a negative current account balance means the country is being rebuilt—and that is a good thing.

Key concepts and summary

There is a difference between the level of a country’s trade and the balance of trade. The level of trade is measured by the percentage of exports out of GDP, or the size of the economy. Small economies that have nearby trading partners and a history of international trade will tend to have higher levels of trade. Larger economies with few nearby trading partners and a limited history of international trade will tend to have lower levels of trade. The level of trade is different from the trade balance. The level of trade depends on a country’s history of trade, its geography, and the size of its economy. A country’s balance of trade is the dollar difference between its exports and imports.

Trade deficits and trade surpluses are not necessarily good or bad—it depends on the circumstances. Even if a country is borrowing, if that money is invested in productivity-boosting investments it can lead to an improvement in long-term economic growth.

Questions & Answers

what is tourism
forgive Reply
Tourism is travel for pleasure or business
Yusuf
It is the commercial organization and operation of holidays and visits to places of interest.
Nureni
who is a price taker?
sam Reply
A price taker is a person or a company who have no control to dictate a prices of a goods or services
Unique
Someone who sets price
Nureni
In the trading world, a price taker is a trader who does not affect the price of the stock if he or she buys or sells shares.
Nureni
in a common and suitable sense state the law of diminishing returns
Unique Reply
The higher the satisfaction derived from a particular commodity,the lower the demand for it but that law doesn't match in some instances.
Nureni
state the features of an imperfect competitive market
Naomi
@NURENI instance like wat
Unique
imperfect competitive market involves large number of sellers and buyers price makers selling cost product differentiation free entry and exit of a firms
Unique
is economics a science
Alex Reply
yes. a social science.
Carlos
Yes of cause It uses scientific principles in its research. That is to say, analyzing data, making experiment as well as making deductions and drawing conclusions
Aziz
U can understand the scientific nature of economics by learning about the methods used by Abhijit Banerjee(indian) ,the nobel prize laureate 2019.
Harshita
it is considered as a social science
idk
Hence, economics is a science, a social science many can call it, or more appropriately, a young science
Taha
it can be called social science because of behaviour ,which is unpredictable.There r many theroies in economics which make economics a social science But some economic theories makes it science
Harshita
human behaviour*
Harshita
remember science derives from the root words "to know". With that being said most fields of study can be considered as a science or soft science, for they possess key knowledge to attaining understanding of our world.
Alexander
economics is a science cos it deals with human wants, desire or neads in order to satisfy them
Unique
according comparision of political science economic is science.
Hassan
what's the question?
Nureni Reply
Discuss economics system
Henry Reply
discuss institutional system
Henry
Give 3 at most advantages and disadvantages of economics system and institutional syatem
Henry
Give the features characteristics of market or free enterprise
Henry
The structure of an economy is largely determined by the economic system which is a function of the economic ideology of the nation
Nureni
The economic system is grouped into 5 groups: 1: Pure market 2: Developed market 3: Centrally planned or Socialist 4: Mixed market and 5: Market Socialist Economic systems
Nureni
what is inflation
Prince Reply
hello everyone , I'm New here, third degree price discrimination?
Saeed Reply
2nd degree price discrimination?
Saeed
hi
Kini
hi
Mitchel
Hi
MP
price paid by consumers after the sales tax is called?
Pinias Reply
why government impose price floor on certain products?
Pinias
how can black market be occurred when price ceiling is introduced?
Pinias
How can inflation affect goods and services?
Ph
When prices rise for energy, food, commodities, and other goods and services, the entire economy is affected
Joan
If inflation becomes too high the economy can suffer conversely, if inflation is controlled and at reasonable levels, the economy may prosper. With controlled, lower inflation, employment increases.
Joan
Is it necessary to make decision when it fails you
Evelin Reply
Pls when what fails u
MP
I think so
Kini
well i might naught know what you on about but i gotta tell you, it is necessary
Troy
yep
Ibe
Kk
MP
yep
Ibe
how can the demand side approach solve unemployment
Tshepiso Reply
demand solves unemployment when it is addressed with supply you can't just expect demand to work alone without supply the two are interconnected
Nureni
demand side approach to solve unemployment
Tshepiso Reply
no get ur questions
Ibe
differentiate between choice and scale of preference
ALFRED Reply
choice are the various wants of every individual whiles scale of preference is the list of unsatisfied wants arranged in order of important priority
Kini
choice refers to the act of selecting from alternatives or it refers to the act of choosing one thing instead of the other but Scale of preference refers to the listing of wants in order of important by providing the pressing need on top and the less pressing need at the bottom
Ebenezer
four cardinal types of demand
Henry Reply
what are the types of demand
Henry
they are the derived,complementary,substitute and supplementary demands
Kini
What is equilibrium
Khan
hi
Ayesha
hello
Kini
equilibrium is the state of balance where there is no tendency for a change to occur.
Kini
Derived, competitive, complementary and composite demands
Aziz
Hi
MP
why is economics said to be a dismal science?
Kini
hi friends
Ibe
hello
Owusu
fyn
Ibe
fyn what is meaning of monopoly
Ibe
monopoly is when a particular good is produced without competing with any other good.
Ebenezer
good evening
Tweneboah
draw the market demand curve from the individual demand curve?
Shilpa
With the aid of diagrams,compare the short run equilibrium positions of a perfect competitor and an imperfect competitors
Monlay Reply

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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