Cyclical and Structural Trade Deficits
- AS, A-Level, IB
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 30 Mar 2021
In this video we look at the important difference between a cyclical and a structural trade deficit.
Trade deficits occur when the value of imports exceeds the value of exports sold overseas for a country over a given time period.
Cyclical trade deficit
This is when a country’s trade balance in goods and services deteriorates during a period of rapid economic growth. Higher incomes and spending can lead to a fast-growth of imports and exports might slowdown if domestic demand is high.
Structural trade deficit
A structural trade deficit is one that arises due to supply-side weaknesses in a country rather than a change in GDP or currency – structural trade deficits are often caused by relatively poor price and non-price competitiveness.
Key causes of a cyclical trade deficit
- Phase of fast “above-trend” growth leading to a surge in imported components, raw materials, finished products
- Cyclical rise in global commodity prices (especially for countries that are net importers of commodities)
- Rising real incomes and consumer spending – leading to increased import demand especially when the marginal propensity to import is high
- Strong (possibly over-valued) exchange rate making imports cheaper and exports more expensive (remember the acronym: SPICED)
- Recession in the economy of a country's major trade partner – negatively affecting export sales & revenues
Key causes of a structural trade deficit
- Low levels of business investment
- Low relative labour productivity
- High unit labour costs
- Long term decline in the world price of a country’s major export
- Weaknesses in design, branding, performance & other non-price factors
Trade deficits are also linked to the stage of economic development that a country may have reached. Many developing / emerging countries run large trade deficits because they are importing capital equipment and components that they cannot produce themselves.