Imagine a world with only two countries: the United States and Otherland. These two countries trade with each other a lot, and although the United States is smaller, it has a large population of active consumers that is attractive to Otherland’s companies. The United States runs budget deficits much larger than Otherland’s and finances these through loans. The picture below shows the two countries’ economic activity (representing the entire economic activity in this fictional world). ![[imagine-the-world-is-just-two-countries.jpg|500]] Most of the exports and imports between the two countries are balanced, except for a little bit at the top of the bars. The extra exports from Otherland are bought based on credit extended by Otherland to the United States. Otherland is happy to create the goods upfront, be paid back over time by the United States, and receive a small interest on the loan. The green bars on the bottom represent the repayment over an extended period. The trade imbalance is just a function of the United States’ willingness to run a budget deficit and Otherland’s willingness to loan money to finance it. Do you see it? No? Below is a picture that shows the activity as if the entire world were a single country. ![[the-world-as-one-country.jpg|350]] The imports and exports cancel out, and the only part left is the excess activity, which was brought forward in time using credit (which is how the budget deficit is financed) but incurs an obligation to pay it back later with interest. The size of the trade imbalance between countries is not inherently good or bad; it's just a number. Much more detail on this from [Paul Krugman](https://paulkrugman.substack.com/p/a-balance-of-payments-primer-part?utm_source=substack&utm_medium=email) and the [CATO Institute](https://www.cato.org/policy-analysis/balance-trade-balance-power#what-determines-us-trade-deficit) ©️ 2025 Krisztian Flautner