Economics Trade Surpluses And Deficits Questions
The relationship between trade surpluses and deficits and exchange rates is that trade surpluses tend to strengthen a country's currency, while trade deficits tend to weaken it.
When a country has a trade surplus, it means that it is exporting more goods and services than it is importing. This leads to an increase in demand for the country's currency, as foreign buyers need to purchase the currency to pay for the exported goods and services. The increased demand for the currency strengthens its value in the foreign exchange market, resulting in an appreciation of the currency's exchange rate.
On the other hand, when a country has a trade deficit, it means that it is importing more goods and services than it is exporting. This leads to an increase in the supply of the country's currency in the foreign exchange market, as the country needs to sell its currency to purchase foreign goods and services. The increased supply of the currency weakens its value, causing a depreciation of the currency's exchange rate.
Therefore, trade surpluses generally lead to a stronger currency, while trade deficits tend to result in a weaker currency.