The difference between a trade surplus and a trade deficit

A trade surplus and a trade deficit are both measures of a country’s balance of trade. They are a calculation of whether a country exports or imports more.

What is a balance of trade, and how is it calculated?

A country’s balance of trade measures whether the country imports more goods and services from other countries or exports more to them. It is the difference between the total value of a country’s imports and the total value of its exports.

Balance of trade = Value of exports - Value of imports

If the result of this calculation is a positive number, a country has a trade surplus. This means it exports more to other countries than it imports from other countries. If the result is a negative number, the country has a trade deficit because it imports more than it exports. But balance of trade is not a scorecard that tracks whether one country is winning or losing its trading relationship with another country. A trade deficit is not necessarily bad, and a trade surplus is not necessarily good.

In most cases, a country has a trade deficit with some countries and a trade surplus with others. But trade is always beneficial because it:

• keeps prices low by encouraging competition
• offers consumers more choices
• gives businesses access to more potential customers, driving productivity
• allows each country to focus on what it is best at producing
• creates jobs in production and logistics

Trade can benefit an economy—regardless of its balance of trade

Whether a country runs a trade surplus or a trade deficit, it can still benefit from international trade. This is because of comparative advantage—a country’s ability to produce a good or service more efficiently than it can be produced elsewhere. A country benefits from trading a good or service it has a comparative advantage in producing because it is profitable for them to do so. But the country buying that good or service stands to gain too.

For example, a country with abundant and readily available mineral resources could produce metals such as steel or aluminum efficiently, and it might sell those metals to another country with more limited resources. But even if the trading relationship between the two countries is largely one way, both countries can still benefit. Here’s how comparative advantage works:

• The exporting country gets access to more buyers and makes efficiency gains through economies of scale—the cost savings that can be achieved by producing higher volumes of a good.
• The importing country pays less to buy steel and aluminum than it would cost to produce them itself—and it gets to focus its economy on producing things it can make more profitably.

A balance of trade can include goods and services

Both goods and services can be counted in a country’s balance of trade, and trade in services is also important to the Canadian economy. Canadians buy and sell hundreds of billions of dollars worth of services internationally each year, and services exports are growing faster than goods exports. Canada has been particularly successful at exporting computer and information services, research and development, and technical services like engineering. Services account for about a quarter of Canada’s exports, and there are opportunities for services exports to grow. Because many services can be delivered digitally, it is possible for companies that sell services to reach markets anywhere in the world.

Each country’s economy is unique—and its balance of trade is too

A country’s ideal balance of trade will depend on its economic circumstances. Sometimes Canada has a trade surplus. And sometimes it has a trade deficit. But whether we are importing more or exporting more, trade is a major driver of our economy. Trade accounts for about two-thirds of Canada’s total economic output. Exports create jobs in production and logistics, which drives economic activity. Imports offer consumers more choices and help keep prices low by encouraging competition. By boosting productivity and encouraging competition, international trade drives economic growth and can help keep inflation low, stable and predictable.