Although a nation’s balance of payments bears similarities to the accounting system of a company, deficit or surplus measures in the balance of payments are much different from a corporation’s bottom line – that is, its net expenditures relative to receipts. Economist Paul Krugman of the Massachusetts Institute of Technology argues that a nation’s balance of payments differs from a corporate income statement in four important ways.

1. The bottom line for a corporation is truly its bottom line. If a corporation persistently fails to meet commitments to pay its employees, suppliers, and bondholders, it will go out of business. Countries, in contrast, do not go out of business.
2. Bottom lines for a country, such as the merchandise trade balance, do not necessarily indicate weakness or strength. A deficit is not necessarily good or bad.
3. U.S. residents typically consume about 90 percent of the goods and services produced within U.S. borders. Even the largest corporations rarely sell any of their output to their own workers. By way of contrast, the exports of Microsoft – its sales to people who do not work for the company – account for nearly all of its sales.
4. Countries do not compete the same way that companies do. A negligible fraction of Netscape’s sales go to Microsoft Corporation, for instance. Countries may export and import large portions of their goods and services, however.

Thus, we must be very cautious about drawing conclusions about the meaning of a deficit or surplus in a nation’s balance of payments accounts. Using balance of payments statistics to support an argument that one nation is more viable or more competitive than another may be completely misguided.

Under what circumstances might a nation find a trade deficit to be beneficial?