6th June 2023 (6 Topics)
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What is affecting trade momentum?
Context
According to information, India’s merchandise exports shrunk 12.7% on a year-on-year (YoY) basis to $34.66 billion in April — a six-month low.
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Merchandise exports and Imports:
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About
- The fall in imports and exports is not limited to India as other countries too have recorded similar declines — affirming the notion about slowing global demand.
- The essential headwinds observed with respect to global trade are due to reasons like;
- Inflation and tightening of monetary policies,
- disrupted supply chains because of the Russia-Ukraine conflict and
- Financial instability because of the collapse of several financial institutions in advanced economies.
- The collapse of financial institutions — such as of the crypto exchange FTX (November 2022) alongside three banks in the U.S. since March (the Silicon Valley Bank, Signature Bank and First Republic Bank), and the loss of confidence in Credit Suisse added to the troubled scenario.
What is a Trade deficit?
- In the simplest terms, a trade deficit occurs when a country imports more than it exports.
- A trade deficit is neither inherently entirely bad good nor, although very large deficits can negatively impact the economy.
Why trade deficits are matter of concern?
- A trade deficit occurs when the value of a country's imports exceeds the value of its exports—with imports and exports referring both to ‘physical goods and services’.
- A trade deficit means a country is buying more goods and services than it is selling.
- An overly simplistic understanding means that this would generally hurt job creation and economic growth in the deficit-running country.
- A trade deficit is about an imbalance between a country's savings and investment rates.
- It means a country is spending more money on imports than it makes on exports, and under the rules of economic accounting it must make up for that shortfall.
- The U.S., for example, can do so by either borrowing money from foreign lenders or permitting foreign investment in U.S. assets.
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Note:
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Other related terms:
- Current Account Deficit:
- The current account records exports and imports in goods and services and transfer payments. It represents a country’s transactions with the rest of the world and, like the capital account, is a component of a country’s Balance of Payments (BOP).
- There is a deficit in Current Account if the value of the goods and services imported exceeds the value of those exported.
- Balance of Payments: Balance of Payment (BoP) of a country can be defined as a systematic statement of all economic transactions of a country with the rest of the world during a specific period usually one year.
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