Question

Why a nation with a current account deficit is a net external borrower, while a nation with a current account surplus is a net external lender?

Answer 1

The current account measures a country's imports and exports of goods and services over a defined period of time, in addition to earnings from cross-border investments, and transfer payments.When credits exceed debits, the country enjoys a current account surplus, meaning that the rest of the world is in effect borrowing from it. A current account surplus increases a nation's net assets by the amount of the surplus.

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While an existing deficit can imply that a country is spending beyond its means, having a current account deficit is not inherently disadvantageous. If a country uses external debt to finance investments that have higher returns than the interest rate on the debt, the country can remain solvent while running a current account deficit. If a country is unlikely to cover current debt levels with future revenue streams, however, it may become insolvent.