Debt-To-GDP Ratio

Published May 15, 2023

Definition of Debt-to-GDP Ratio

The debt-to-GDP ratio is a measure of a country’s total debt compared to its gross domestic product. It indicates the percentage of a country’s GDP that is taken up by its debt. Typically, it is used to assess a country’s ability to pay back its debt and manage its finances effectively.

Example

To give an example, let’s say Country A has a debt of USD 10 trillion and a GDP of USD 40 trillion. Its debt-to-GDP ratio would be 25%. Contrast that with Country B, which has a debt of USD 2 trillion and a GDP of USD 10 trillion. Its debt-to-GDP ratio would be 20%.

In this example, Country A has a higher debt-to-GDP ratio than Country B. This means that Country A has more difficulty paying back its debt and controlling its finances than Country B. Generally speaking, the higher the debt-to-GDP ratio, the more vulnerable a country may be to economic shocks, such as a recession or a natural disaster.

Why Debt-to-GDP Ratio Matters

Debt-to-GDP ratio is a critical metric for policy-makers and economists to track. High ratios can signal that a country may be at risk of defaulting on its debt or having difficulty accessing credit markets in the future. This can have dire consequences, such as skyrocketing interest rates, higher borrowing costs, and a decline in global confidence and trust in the economy. As such, it is crucial to keep a close eye on the debt-to-GDP ratio and ensure that public finances are sustainable in the long term.