Debt to GDP Ratio

Government debt is the total amount a country's government owes to lenders. But the amount of debt alone does not show if a country’s debt is manageable.

Economists compare debt to the GDP of the economy to get the debt-to-GDP ratio.

GDP shows the income an economy generates in a year.

So the debt-to-GDP ratio shows how large the debt burden is relative to the economy’s ability to repay it.

Consider two hypothetical economies, A and B. Both owe five trillion dollars in government debt.

Economy A's GDP is twenty trillion dollars, with a debt-to-GDP ratio of 25 percent.

Economy B's GDP is five trillion dollars, with a debt-to-GDP ratio of 100 percent.

So, their debt amounts are the same, but their debt burdens are different. Economy B carries a heavier burden. It has less economic output available to service the same amount of debt.

Other things being equal, a lower debt-to-GDP ratio suggests that a country can manage its debt more easily.

A higher ratio shows more pressure on government finances, especially if borrowing costs rise or if unexpected shocks happen.