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Concept
Debt-to-GDP ratio
Summary
In economics, the debt-to-GDP ratio is the ratio between a country's government debt (measured in units of currency) and its gross domestic product (GDP) (measured in units of currency per year). A low debt-to-GDP ratio indicates that an economy produces goods and services sufficient to pay back debts without incurring further debt. Geopolitical and economic considerations – including interest rates, war, recessions, and other variables – influence the borrowing practices of a nation and the choice to incur further debt.
It should not be confused with a deficit-to-GDP ratio, which, for countries running budget deficits, measures a country's annual net fiscal loss in a given year (total expenditures minus total revenue, or the net change in debt per annum) as a percentage share of that country's GDP; for countries running budget surpluses, a surplus-to-GDP ratio measures a country's annual net fiscal gain as a share of that country's GDP.
Particularly in macroeconomics, various debt-to-GDP ratios can be calculated. The most commonly used ratio is the government debt divided by the gross domestic product (GDP), which reflects the government's finances, while another common ratio is the total debt to GDP, which reflects the finances of the nation as a whole.
The debt-to-GDP ratio is technically not a dimensionless constant, but a unit of time, being equal to the amount of years over which the accumulated economic product equals the debt.
The change in debt-to-GDP is approximately "net change in debt as percentage of GDP"; for government debt, this is deficit or (surplus) as percentage of GDP.
This is only approximate as GDP changes from year to year, but generally, year-on-year GDP changes are small (say, 3%), and thus this is approximately correct.
However, in the presence of significant inflation, or particularly hyperinflation, GDP may increase rapidly in nominal terms; if debt is nominal, then its ratio to GDP will decrease rapidly. A period of deflation would have the opposite effect.
Official source
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