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What is the Relationship Between Public Debt and GDP?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 14 September 2016
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One factor in determining the economic position of a country is through a comparison of public debt to the gross domestic product (GDP) of the country. This comparison is often listed as a percentage of how much of the GDP it would take to pay off the public debt. A low public debt and GDP percentage is usually an indication of economic health, while a high public debt and GDP percentage can indicate financial trouble for a country.

The GDP of a country measures its total output of all goods and services. Generally measured on a yearly basis, the GDP can actually be calculated in several different ways. Most common means of calculating the GDP involve totaling the created wealth of country-produced goods and services and subtracting expenditures and imports. Almost all accepted formulas for calculation will return roughly similar results.

Public debt refers to all money owed by branches of government within a nation. This includes external debt to foreign investors as well as debt owed to citizens through systems such as bonds. Public debt can be incurred by any branch or level of government, including local governments, state or regional governments, and federal branches.

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It is important to note that the relationship between public debt and GDP is abstract. Nations do not actually pay off public debt per year according to the ratio of debt and GDP. Since most public debt is paid off over many years and even altered or added to as time goes by, the relationship between public debt and GDP is merely used to illustrate and illuminate the financial state of a nation.

Despite the limited real meaning of GDP and public debt ratios, the comparison is taken very seriously, as it indicates how able a nation will be to pay off debts. When the Eurozone was created in 1999, member nations had to prove a debt to GDP ratio of under 60% to be allowed to join the currency. This was to ensure that the euro would remain relatively stable despite becoming the backbone of many widely different economies throughout Europe.

GDP and public debt are constantly linked in discussion about economic health. A country with a higher debt than GDP may be in serious financial trouble, just like a person who has more credit card debt than yearly income. While the individual foundering in debt may have trouble fending off creditors and facing falling credit scores, a nation in financial trouble can cause problems that may damage economies throughout the world.

If a nation defaults on public debt, billions or even trillions of dollars may be at stake. Governments may not be able to make good on internal debt such as bonds, while foreign investors may go unpaid for goods, services, or loans purchased on the credit of the drowning country. For this reason, intergovernmental watchdog agencies such as the International Monetary Fund have been established to help recognize growing potential for default and help prevent this from occurring. Though somewhat shadowy and controversial, these agencies attempt to help countries lower public debt and GDP ratios to help promote a healthy economy capable of making good on all debts.

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ValleyFiah
Post 3

@Georgesplane & Chicada- How do we define economic human rights? Is there such a thing? I would think that this would be the next big frontier of human rights. GDP statistics are beginning to include more and more of the resources that are necessary to human life and things that should be considered private or owned by the public. These are things like water, clean air (health care costs associated with pollution), genetics, and the likes. It is crazy how many basic human rights are essentially privatized and traded in the name of increasing economic growth.

chicada
Post 2

@georgesplane- It seems that a lot of the inner workings of the economy completely contradict economic theory. I went to a great film viewing and panel discussion that examined the relationship between happiness and economic growth. One thing that struck me the most was that economic growth often does not correlate with happiness.

Indicators that track quality of life often go down as the GDP climbs. This is not just relevant to the local economy, rather it is relevant to the world economy. As wealth climbs in one region, overall happiness in another must decline for that wealth to be generated.

An example would be the case of Jamaica. The IMF and many of the industrialized nations had

the island state sign trade agreements that stripped the nation of the authority to tax or subsidize imports, even though the nations importing their goods were heavily subsidizing those goods.

The result has been very mild growth, but little improvement in quality of life. The lopsided "free Trade" agreements have resulted in an erosion of social programs in Jamaica. The market for Jamaican goods has also disappeared. Through these agreements, Jamaica has lost its entire comparative advantage for the sake of further growth in the developed world. While the global economy has seen a net benefit form Jamaica's demise, the people of Jamaica have sunk into misery.

Georgesplane
Post 1

I would argue the assumption that most economists make that a low National Debt as a percentage of GDP is a sign of economic health. While it can be a sign of economic health, it is increasingly a sign of economic disparity amongst the citizens. Some of the countries with the lowest debt to GDP ratios have the highest income inequality (GINI Coefficient) and a large percentage of their population living in below the poverty line.

The perfect example would be South Africa. The country has one of the highest GINI coefficients in the world, half of its population lives under the poverty line, yet it has a national debt to GDP ratio that is only half that of the United States. This is nowhere near being economically healthy. this only means that a select few, likely large companies and multinationals, are economically healthy within the country.

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