Explain why the distinction between debt and equity finance, International Economics

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Q. Explain why the distinction between debt and equity finance is useful in analyzing the response of developing countries to unforeseen events such as recession or terms of trade change?

Answer: While a country's liabilities are in the form of debt it's fixed scheduled payments to creditors don't fall when its real income falls. This makes it complicated to honour the developing country's foreign obligation and may lead to default.


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