Deficit is an economic condition in which spending exceeds income. One example of a deficit would be a situation, in which a nation’s imports exceed its exports, creating a trade deficit. Another example is a company’s losses surpassing its profits. In such an event an organization is said to have a budget deficit. A prolonged state of deficit may be perilous to any entity, including a government. Namely, extensive periods of deficit may lead to inflation. When deficit occurs, governments may turn to borrowing in order to correct the resulted imbalance. Borrowing to compensate for revenue shortfall is called deficit financing. Though deficit financing may initially stimulate the economy, it is a short term solution. For in perpetuity, deficit financing can substantially inflate interest rates. |
