What Is Trade Surplus?

Breaking Down Trade Surplus

A trade surplus can create employment and economic growth, but may also lead to higher prices and interest rates within an economy. A country’s trade balance can also influence the value of its currency in the global markets, as it allows a country to have control of the majority of its currency through trade. In many cases, a trade surplus helps to strengthen a country’s currency relative to other currencies, affecting currency exchange rates; however, this is dependent on the proportion of goods and services of a country in comparison to other countries, as well as other market factors. When focusing solely on trade effects, a trade surplus means there is high demand for a country’s goods in the global market, which pushes the price of those goods higher and leads to a direct strengthening of the domestic currency.

Trade Deficit

The opposite of a trade surplus is a trade deficit. A trade deficit occurs when a country imports more than it exports. A trade deficit typically also has the opposite effect on currency exchange rates. When imports exceed exports, a country’s currency demand in terms of international trade is lower. Lower demand for currency makes it less valuable in the international markets.

While trade balances highly affect currency fluctuations in most cases, there are a few factors countries can manage that make trade balances less influential. Countries can manage a portfolio of investments in foreign accounts to control the volatility and movement of the currency. Additionally, countries can also agree on a pegged currency rate that keeps the exchange rate of their currency constant at a fixed rate. If a currency is not pegged to another currency, its exchange rate is considered floating. Floating exchange rates are highly volatile and subject to daily trading whims within the currency market, which is one of the global financial market’s largest trading arenas.