During the 1990s the countries of Mexico and Argentina went from econo

During the 1990s the countries of Mexico and Argentina went from economic paupers with huge foreign debts (capital account deficits) to countries posting strong economic growth and welcoming foreign investment.

What would you expect these changes to do to their current account balances?
What will be an ideal response?

ANSWER

Answer: One would expect the current account balances to swing from surplus to deficit. Prior to the 1990s both countries had capital account deficits, which indicated a capital flight. As their economic growth increased and changed for the better, capital would most likely flow back into the countries. The result would be a capital account surplus. Given that the current account balance is the negative of the capital account balance, we would expect an initial current account deficit changing to a surplus.