Every month, India's trade data comes out - and the media reports the change in our trade deficit. It reports an increase in our trade deficit as bad news - and a decrease in our trade deficit as good news.
Ideally a country must have a trade surplus - or at least, not have a trade deficit. So by extension, an increase in the trade deficit is bad - and a decrease in the trade deficit is good. And vice versa for trade surplus. But this is in the long run. In the short run, there is a paradox in the relationship between:
1. The change in a country's trade deficit/surplus
2. The country's economic growth relative to the world
This follows from a basic law of economics:
1. A country's imports are proportional to its economy's output
2. But its exports are proportional to the world economy's output*
(everything else remaining the same)
Scenario 1: A country's economy does better than the world economy - ie, the country's growth rate increases and the world's growth rate decreases. Here the country's imports will increase (because its growth rate has increased) and its exports will decrease (because the world's growth rate has decreased) - so its trade deficit will increase (or its trade surplus will decrease).
Scenario 2: A country's economy does worse than the world economy - ie, the country's growth rate decreases and the world's growth rate increases. Here the country's imports will decrease (because its growth rate has decreased) and its exports will increase (because the world's growth rate has increased) - so its trade deficit will decrease (or its trade surplus will increase).
Thus we have the paradoxical situation where a country's trade deficit increases when its economy does better than the world economy - and decreases when its economy does worse than the world economy. And vice versa for trade surplus.
Of course, in the long run, we must improve our competitiveness (especially in manufacturing), increase our exports, reduce our trade deficit - and eventually become a trade-surplus country. But till then, we must take negative news-reports about an increase in our trade deficit (and positive news-reports about a decrease in our trade deficit) with a pinch of salt . . .
Caveat: This analysis is based on the assumption that everything else remains the same - which never happens in the real world. Trade is a system of equations with many variables. Example: Our trade deficit usually increases in the festival season (Oct/Nov) due to an increase in gold imports.
*[More correctly: A country C's exports are proportional to the weighted average of the outputs of its export markets - where each export-market's weight is its share in the total exports of country C. I have used the terms "world economy", "world economy's output" and "world's growth rate" as approximations]
Ideally a country must have a trade surplus - or at least, not have a trade deficit. So by extension, an increase in the trade deficit is bad - and a decrease in the trade deficit is good. And vice versa for trade surplus. But this is in the long run. In the short run, there is a paradox in the relationship between:
1. The change in a country's trade deficit/surplus
2. The country's economic growth relative to the world
This follows from a basic law of economics:
1. A country's imports are proportional to its economy's output
2. But its exports are proportional to the world economy's output*
(everything else remaining the same)
Scenario 1: A country's economy does better than the world economy - ie, the country's growth rate increases and the world's growth rate decreases. Here the country's imports will increase (because its growth rate has increased) and its exports will decrease (because the world's growth rate has decreased) - so its trade deficit will increase (or its trade surplus will decrease).
Scenario 2: A country's economy does worse than the world economy - ie, the country's growth rate decreases and the world's growth rate increases. Here the country's imports will decrease (because its growth rate has decreased) and its exports will increase (because the world's growth rate has increased) - so its trade deficit will decrease (or its trade surplus will increase).
Thus we have the paradoxical situation where a country's trade deficit increases when its economy does better than the world economy - and decreases when its economy does worse than the world economy. And vice versa for trade surplus.
Of course, in the long run, we must improve our competitiveness (especially in manufacturing), increase our exports, reduce our trade deficit - and eventually become a trade-surplus country. But till then, we must take negative news-reports about an increase in our trade deficit (and positive news-reports about a decrease in our trade deficit) with a pinch of salt . . .
Caveat: This analysis is based on the assumption that everything else remains the same - which never happens in the real world. Trade is a system of equations with many variables. Example: Our trade deficit usually increases in the festival season (Oct/Nov) due to an increase in gold imports.
*[More correctly: A country C's exports are proportional to the weighted average of the outputs of its export markets - where each export-market's weight is its share in the total exports of country C. I have used the terms "world economy", "world economy's output" and "world's growth rate" as approximations]
