Effects of a Trade Deficit

Initially, a trade deficit is not a bad thing. It raises the standard of living of a country's residents, since they now have access to a wider variety of goods and services for a more competitive price. It can reduce the threat of inflation, since the products are priced lower. A trade deficit can also indicate that the country's residents are feeling confident, and wealthy, enough to buy more than the country produces.

Over time, however, a trade deficit can cause jobs outsourcing. That's because, as a country imports certain goods rather than buying domestically, the local companies start to go out of business. The domestic business itself will lose the expertise needed to produce that good competitively. As a result, fewer jobs in that industry are created in the home country. Instead, the foreign companies hire new workers to keep up with the demand for their exports.