Trade Surplus: Economics Definition And China Example

Table of Contents

1. What is a Trade Surplus?
2. How Does a Trade Surplus Work in Economics?
3. Trade Surplus vs. Trade Deficit: What is the Difference?
4. What are the Negative Effects of Trade Surplus?
5. Trade Surplus Real-Life Example: Economy of China

What is a Trade Surplus?

A Trade Surplus means a country’s trade balance is positive, i.e. the value of the country’s net exports is greater than the value of its imports from other countries.

How Does a Trade Surplus Work in Economics?

The trade balance of a country is determined by comparing the sum of all its imports (i.e. the total value of the products it purchases from other countries) and its exports (i.e. the value of all the products it distributes to other countries).

Often called the “balance of trade”, the trade balance is the difference between the value of a company’s exports relative to its imports.

Balance of Trade = Value of Exports – Value of Imports

Where:

• Exports → Goods and services sent to other countries
• Imports → Goods and services brought into the country

If the balance of trade is positive, the total value of the country’s exports is greater than its imports.

The effects of a trade surplus tend to be positive, such as more economic output, higher employment rates, and a more favorable outlook on near-term economic growth.

Trade Surplus vs. Trade Deficit: What is the Difference?

The inverse of a trade surplus is termed a “trade deficit”, which occurs when the balance of trade is negative, meaning that the total value of the country’s imports exceeds that of its exports.

• Trade Surplus → Exports > Imports (Positive Trade Balance)
• Trade Deficit → Imports > Exports (Negative Trade Balance)

If imports exceed exports over the long term, a country with a trade deficit is prone to currency devaluation because of the reduced demand in terms of international trade among different countries.

Contrary to a trade surplus, a lower demand for a country’s currency in a trade deficit causes the currency to become less valuable relative to other currencies.