National Debt As A Percentage Of GDP

You can determine the national debt a number of different ways. Figuring the national debt as a percentage of GDP is the most common measurement used by analysts.

GDP

GDP refers to the gross domestic product of a country. The gross domestic product represents the total value of all services and products produced over a certain period of time. The time can be a fiscal year, but is usually a calendar year for the county in question.

Why GDP?

Why use GDP in national debt calculations? The debt to GDP ratio is perhaps the most accurate method for not only assessing the health of an economy, but for comparing it to other economies in the world. Let’s look at an example.

Greece has had a rough few years. The Greek government is dead broke, corruption is rampant and civil unrest is being seen. It is the classic picture of a government that has promised more than it can deliver. Other countries have similar national debt problems, but how do you compare them to Greece? Consider the United States. How can you possibly compare the economy of this small country of islands with the biggest economy in the world? The answer is to look at national debt as a percentage of the GDP.

Current GDP

As I write this on May 19, 2011, the national debt as a percentage of GDP in the United States is 96 percent, but is set to go up if the national debt ceiling is raised before August 2011 as is currently being negotiated.

The 96 percent figure is a very worrying one. Why? History. A study of past cases of high national debt reveals most countries start having major economic and financial problems when the percentage rises above the 90 percent level. Indeed, this is how many great civilizations slowly fell apart – rising debt that could not be shouldered.

What is the problem? Well, there are a host of them and you can read about them throughout our site. One of the big ones is a lack of infrastructure. This country grew like mad during the last century. One of the major reasons was all the money invested in infrastructure ranging from the highway system to the electric grid and so on. Currently, we don’t have money to invest in these things and that state of our infrastructure has recently been rated as a “D” on an A through F scale. Instead of spending $400 billion a year to improve it, we spend this money on paying the interest on the national debt. By 2020, our current fiscal course will result in the government being able to pay only for Social Security, Medicare and a small military. That’s a problem.

The national debt as a percentage of GDP is considered the best measurement of a countries’ economic situation. Unfortunately, it also tells us that we are facing some major problems moving forward.

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