Debt-to-GDP measures spending against the value of a nation's produced goods and services.
A key measurement of a nation’s economic health is its debt-to-GDP ratio. Just as businesses can have a healthy amount of debt, so too can countries. However, the balance of debt-to-GDP is delicate: If the scale tips too far in one direction, the country experiences trouble at the local and international levels.
Features of Debt
A country incur debt in a variety of ways, such as importing more than it exports, spending more money than the country raises and buying more reserves of other nations than it sells of its own. In each of these three methods, debts can accrue through purchasing and spending decisions. A nation imports goods from other nations such as cars, textiles and food, all of which cost money. The country spends money on programs such as the military, education and, in the U.S., Medicare, Social Security and unemployment benefits. A country can also buy foreign reserves of other nations as an investment, such as bonds, currency and treasury bills.
Features of GDP
Nations accrue money in ways similar to how they spend it. How much a nation produces is known as its gross domestic product or, GDP. GDP measures the flow of goods and services through a country, and it is not necessarily an indicator of a country’s overall well-being. Investopedia explains that GDP is equal to the nation’s consumption, government spending, capital investments and net exports. Countries sell exports based on whatever they produce most efficiently: In the U.S., common exports are corn, grains and meat. Net exports is the amount left over when the amount imported is subtracted from the amount of money exported. Consumption consists of consumer spending on things like transportation, entertainment and food.
Identification of GDP Ratio
Though government spending is included in the GDP figure, the money spent is commonly juxtaposed as a percent against the GDP figure. Thus, the debt-to-GDP is how much debt a country incurs divided by its overall GDP.
Significance
Countries must have a balanced debt-to-GDP ratio to have a stable economy. Otherwise, the results are akin to a person maintaining an unsustainable lifestyle with the assistance of a maxed-out credit card. Greece experienced too high of a debt-to-GDP ratio in 2010, and the result was an economic crisis. The Council on Foreign Relations explains Greece’s debt-to-GDP ratio as of 2009 is 113 percent. This means that for every dollar the nation accrues, $1.13 is spent. The CFR explains that the imbalance creates instability: Investors are wary of investing in the country and the euro’s value is compromised.
Considerations
What is considered a healthy ratio depends on a country’s individual circumstances. To join the European Union, for instance, countries must not exceed a debt-to-GDP ratio above 60 percent. Robert Carbaugh, author of "Contemporary Economics," explains some factors that influence a country’s ratio: During WWII, for instance, the U.S. borrowed $236 billion, which resulted in a debt-to-GDP ratio of 106 percent. By 1955, this ratio had dropped to a healthy 57 percent. Though high borrowing is expected during times of war and recessions, countries should not experience a consistently high ratio of debt-to-GDP.
