The purpose of this thesis was to from a Swedish perspective investigate the fantastic growth rates of Estonia and Latvia and why it became such a massive collapse when the world economy was slowing down.

To build a theoretical foundation for the investigation several international macroeconomic theories such as the Mundell-Flemming model, the fundamental national income equilibrium, and international parity relations were used.

The empirical section shows that Estonia and Latvia have based much of their growth on imports from their Baltic and especially their Nordic neighbours. At the same time they have been highly dependent on continuously growing Nordic stock markets and high risk appetite from investors to be able to keep the fabulous growth figures.

The conclusions drawn are that it has been possible for Estonia and Latvia to grow at fast rates, by running large current accounts deficits, as long as the world was in a boom. But when the world economy is slowing down they are now forced into the very painful process of re-establishing a more balanced current account.