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What is a Trade Surplus? Why does it exist? Classiarius Explains

What is a Trade Surplus? Why does it exist? Classiarius Explains 1

A trade surplus is a measurement of positive balance of trade, for example when exports exceed imports. Counties like Japan, South Korea and China, ones that manufacture volumes of steel, autos, ships, and TVs for export are usually countries that run a trade surplus.

Trade Balance = Total Value of Exports – Total Value of Imports.

When this calculation is positive there is a net inflow of the domestic currency of that country, which would be the opposite of a trade deficit, meaning outflow. For example, country A sells 1 billion dollars of autos and electric machinery to country B which provides country A with 500 million dollars of raw materials to build these products. Country A would “run a 500 million dollar surplus with country B.”

Because the factories in country A are busy they employ thousands of people, as the surplus creates employment and economic growth. This is why very efficient economies that rely on exports – Germany, Japan, South Korea and China – to keep their unemployment rates low while Spain, Italy, the UK and the US buy these products. Free trade is good but sometimes the excessive surplus triggers trade wars and accusations of closed markets.

The country with the surplus will usually be forced to open its market to allow more imports in to reduce the trade surplus. This discussion is taking place between the US and Germany and the US and China in 2017 and 2018, right now, as I type. More on Trade in the coming weeks and months.

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