What does a trade deficit indicate?

A trade deficit indicates that a country is spending more on foreign trade than it is earning. This situation arises when a country's imports of goods and services exceed its exports. Consequently, the country is buying more from abroad than it is selling, resulting in an outflow of money to foreign markets. Trade deficits can occur for various reasons, such as increased domestic consumption, a stronger currency making imports cheaper, or a lack of competitive domestic industries.

This condition is significant because it can affect currency values, balance of payments, and economic policy. While persistent trade deficits can sometimes raise concerns about national economic stability, they can also signal a strong domestic demand for foreign goods and services or be a result of an economy investing in growth through imports.

The incorrect options reflect alternate scenarios: earning more from exports would indicate a trade surplus, balanced imports and exports denote equilibrium in trade, and self-sufficiency means there is little to no trade occurring.