The United States is the biggest debtor nation. For the past 30 years it has been piling up large trade deficits. The current account peaked at 7 percent of GDP in 2007, and is financed by capital inflows. Foreigners purchase large amounts of U.S. assets, or the current account deficit cannot be financed.
a. Explain why a current account deficit is be financed by capital inflows.
b. Under what circumstances should the debtor nation status of the United States be a concern?