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A debtor nation is a country that has more dollars flowing out of the country than into the country. When a country tabulates its record of all of the monetary transactions between it and other countries, a negative balance of payments (BOP) indicates that the country is a debtor nation. In general, a negative BOP occurs as a result of trade deficits, limited foreign investments in domestic enterprises, or excessive investment by the nation in foreign enterprises. A key element of the BOP is the balance of trade (BOT), which monetarily reflects the difference between money paid for imports and money received for exports. Trade deficits, when the nation’s imports exceed its exports, may result in the devaluation of a debtor nation’s currency if the foreign nations that are holding a significant amount of the currency due to trade begin to sell it off.
Nations classify BOP transactions as either debits or credits, with outflows being debits and inflows being credits. The BOP is further subdivided into the financial account, the current account, and the capital account. A current account records the nation’s current income, goods, services, and unilateral transfers. A net outflow of value from the current account characterizes a debtor nation. A debtor nation may decide to invest money overseas to promote economic growth and productivity, leading to a current account deficit, but such a nation will develop a burdensome deficit if it uses its debts for spending instead of boosting its gross domestic product (GDP).
For example, a debtor nation may intentionally run a deficit to purchase imports that provide the raw materials for finished products that the nation will export. In this situation, the nation incurs a temporary debt to boost exports ultimately, the sale of which will pay off the debt and increase the national income. Furthermore, a nation may invest overseas with the objective of generating future benefits in investment income. Deficits may also result from increasing dividends due to foreign investors. In these situations, running a deficit indicates a strong economy in a nation pursuing an aggressive growth strategy.
When a nation engages in poor financial planning, the government of a debtor nation may spend more than it receives. Uncontrolled military spending or spending on entitlements shifts resources away from economic production. The population may be spending money on expensive imports while the national GDP falters. In such circumstances, a current account deficit is a harbinger of a troubled economy.
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