BACKGROUND OF THE STUDY
International Trade refers to the purchase and sales of commodities among countries. These exchanges of commodities between countries are called imports (when a country purchase from another) and exports when a country sells to another. Trade deficit is simply the difference between the value of exports and value of Imports. Thus, the Trade deficit denotes the differences of imports and exports of a country during the course of year. If the value of its exports over a period exceeds its value of imports, it is called favourable trade deficit and, conversely, if the value of total imports exceeds the total value of exports over a period, it is unfavourable balance of trade. The favorable trade deficit indicates good economic condition of the country.As an economic measure, a negative trade deficit indicates a country’s imports exceed its exports. This is called trade deficits. Trade deficits represents an outflow of domestic currency to foreign markets.
If outflow of domestic currency makes it unfavourable, then favourable balance must also include an inflow of forex. In simple terms trade deficit means there is more coming in than coming out. There are different views of the economists about trade deficit. Some economist postulate that itis beneficial for the source those economist economy to experience a trade surplus as it raises GDP and increases job opportunities. Some consider it bad for economic growth.
According to Sebastin (2007), “A trade deficit, which is also referred to as net exports, is an economic condition that occurs when a country is importing more goods than it is exporting. The deficit equals the value of goods being imported minus the value of goods being exported, and it is given in the currency of the country in question. For example, assume that Nigeria imports 800 billion Naira worth of goods, while exporting only 750 billion Naira. In this example, the trade deficit, or net exports, would be 50 million Naira”.
In terms of the stock market, a prolonged trade deficit could have adverse effects. If a country has been importing more goods than it is exporting for a sustained period of time, it is essentially going into debt (much like a household would). Over time, investors will notice the decline in spending on domestically produced goods, which will hurt domestic producers and their stock prices. Given enough time, investors will realize fewer investment opportunities domestically and begin to invest in foreign stock markets, as prospects in these markets will be much better. This will lower demand in the domestic stock market and cause that market to decline.
Trade deficit is caused when a country cannot produce all it needs. There are underlying causes as well. A country cannot have a trade deficit unless other countries are willing to loan it the funds needed to finance the purchases of imports.
Therefore, a country with a trade deficit will most likely have a current account deficit. Trade deficit can also result if a domestic company manufactures a lot of its products in other countries. If the raw materials are shipped overseas to its plant, that’s counted as an export. When the finished good is shipped back home, that’s counted as an import — even though it’s made by a domestic company. It’s subtracted from the country’s Gross Domestic Product, even though the earnings will benefit the company’s stock price, and the taxes will benefit the country’s revenue stream. Initially, a trade deficit is not a bad thing. It raises the standard of living of a country’s residents, since they now have access to a wider variety of goods and services for a more competitive price. It can reduce the threat of inflation, since the products are priced lower. A trade deficit can also indicate that the country’s residents are feeling confident, and wealthy, enough to buy more than the country produces.
Over time, however, a trade deficit can cause jobs outsourcing. That’s because, as a country imports certain goods rather than buying domestically, the local companies start to go out of business. The domestic business itself will lose the expertise needed to produce that good competitively. As a result, fewer jobs in that industry are created in the home country.
Instead, the foreign companies hire new workers to keep up with the demand for their exports. For this reason, many leaders propose reducing the trade deficit to increase jobs. They often blame trade agreements for causing deficits. A great example is the world’s largest agreement, the North American Free Trade Agreement, or NAFTA. A response to trade deficits is often to raise import tariffs, or other forms of trade protectionism. However, these rarely work. That’s because the industry is usually already moribund, and the skills lost, by the time these policies are suggested.