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What Is The Difference Between External And Internal Debt?

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The first distinction to be made is between an internal debt and an external debt. An internal debt is owed by a nation to its own citizens. Many argue that an internal debt poses no burden because we owe it all to ourselves. While this statement is oversimplified, it does represent a genuine insight. If each citizen owed $10,000 of government bonds and were liable for the taxes to service just that debt, it would make no sense to think of debt as a heavy load of rocks that each citizen must carry. People simply owe the debt to themselves.

An external debt is owed by a nation of foreigners. This debt does involve a net subtraction from the resources available to people in the debtor nation. In the 1980s, many nations experienced serve economic hardships after they incurred large external debts. They were forced to export more than they imported to run trade surpluses in order to service their external debts, that is to pay the interest and principal on their past borrowings. Countries like Brazil and Mexico need to set aside one fourth to one third of their export earnings to se4rvice their external debts. The debt service burden on an external debt represents a deduction in the consumption possibilities of a nation.

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