GDP Debt

By: EconomyWatch Content   Date: 23 November 2009

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GDP debt or debt-to-GDP ratio is a measure of a nation's net debt with respect to its gross domestic product (GDP). This ratio is similar to a coverage ratio, which indicates a corporation’s ability to meet its debt obligations; although it implies at the national level. 

GDP Debt Components

The composition of GDP Debt can be broadly classified into:

Gross Domestic Product

GDP is the sum total of:

Consumption: This includes the sum of private household expenditures in an economy on goods (durable and non-durable) and services.

Investment: This encompasses business investments on:

  • plant
  • equipment
  • inventory
  • household investments on purchasing real estate properties

Purchasing financial products, although considered an investment, is classified under 'savings' for the purpose of calculating GDP, to avoid double-counting

Government spending: This is the net government expenditures on finished goods and services, which include:

  • salaries to public servants
  • purchase of military equipments
  • transfer payments

However, unemployment benefits and social security are not included under government expenditure while calculating the GDP.

Net exports: This is the difference between total exports and imports in a county in a year. The GDP increases when the exports exceed imports and decreases when imports are higher. 

National Debt and GDP Debt

National debt, or public debt, comprises:

Public accounts: The amount owed to the public, as principal and interest, on government securities like:

  • bonds
  • treasury bills
  • notes

Government accounts: The debt owed by the national government to itself in lieu of Social Security and other trust funds.

Debt-to-GDP ratio can be ascertained by dividing the national debt with the gross domestic product. The resultant figure is to measure the country’s ability to make future repayments in favor of its debt. It also represents a country’s financial leverage. The higher the debt-to-GDP ratio, the greater is the probability of default. A high GDP debt also cerates panic in the domestic as well as the international markets.

GDP Debt Applications

Although debt-to-GDP ratio is primarily used for measuring the financial leverage of a nation’s economy, some economists advocate it to be a key measure of credit bubble. A credit or economic bubble is a situation when the volume of trade in an economy is high and the trade prices differ from the intrinsic or fair value of the goods. Such a situation is detrimental to an economy, causing inappropriate allocation and utilization of resources.


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