Economy and stock market are connected to each other. One always gets affected by another. Economic conditions always play a major role in the volatility behavior of the stock market. One of many economic conditions is trade deficit or net exports. In simple words, it is a condition which occurs when a country is importing is more than it is exporting. You can simply calculate it by subtracting the value of goods being imported minus the value of goods being exported.
Measuring the stock deficit is very complicated though. It involves different accounts in order to measure the different flow of investment.
Current Account to measure for all the amounts of importing and exporting goods and services, interest earned from foreign services, and the money transferred. And the financial account is for total changes in foreign and domestic property ownership.
So, think about it?
Some think of it as an increase in standard of living. Especially when you can have access to the wide variety of goods and services. But, when a country is importing more than it is exporting over a period of time then it is definitely going to be in debt. This is why a sustained debt could have adverse effects on the country’s stock market. Eventually, investors start noticing this economic conditions and declining spending on domestic goods which affects domestic companies and their business. The result, the domestic companies, and their stocks affect and start going out of business. Sooner or later, the investors started realizing that there are more foreign investment opportunities than domestic investment opportunities.
This will only lead investors to invest more in foreign markets which will result in lower demand in the domestic stock market, causing it to decline.
Final Thoughts: –
A trade deficit can adversely impact country’s economic growth and its stock market. For this reason, the government has been scheming out to reduce the trade deficit to increase jobs. In doing so, the government often raises import charges and affairs. But, even investors need to consider this on a personal level that trade deficit will only lead to decline in the domestic stock market and eventually, the domestic companies will go out of business.
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Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.