Question

What determines the size of a country’s trade deficit?

Short answer

Size of Imports, exports, savings and spending.

Step-by-step solution

Step1. Introduction

Trade deficit refers to the country's trade balance when the imports of the country exceed the exports of the country.

Step2. Explanation

Trade deficit is the difference of exports and imports in a scenario when the imports exceed exports.

As the definition suggests, it is the size of exports and imports which shall determine the size of trade deficit.

Larger the size of imports, larger will be trade deficit and vice versa.
Smaller the size of exports, larger will be trade deficit and vice versa.

Size of saving increases, smaller will be trade deficit and vice versa.

Size of investment increases, larger will be trade deficit and vice versa.

These relations are based on savings-investment identity.