The debt-to-GDP ratio measures a country’s public debt in relation to its gross domestic output (GDP). The debt-to-GDP ratio is a reliable indicator of a country’s ability to repay its debts since it compares what it owes to what it generates. This ratio, which is often stated as a percentage, can also be understood as the number of years required to repay debt if GDP is totally allocated to debt repayment.
What does the GDP ratio mean?
The debt-to-GDP ratio compares a country’s overall economic output to its sovereign debt. The gross domestic product (GDP) is used to measure its output (GDP). This ratio indicates how well a country’s economy is performing and allows you to compare it to other countries.
What does a good debt-to-GDP ratio look like?
Applications. The debt-to-GDP ratio is a measure of an economy’s financial leverage. The government debt-to-GDP ratio should be less than 60%, according to one of the Euro convergence criteria.
What is Pakistan’s tax-to-GDP ratio?
Both the PTI-led administration and the PML-N will benefit from the re-basing of the economy because the GDP growth number during their terms would be higher. The GDP growth number during the PML-N-led administration increased from 5.78 percent to 6.1 percent GDP growth in 2017-18 due to re-basing of the economy.
On the basis of the base year 2005-6, GDP growth climbed from 3.94 percent to 5.3 percent in 2020-21 during the PTI-led government, but it increased to 5.57 percent with the change of base year in 2015-16.
Between 2005-6 and 2015-16, the national economy was re-based, increasing its size from Rs48 trillion to Rs55.5 trillion. In dollar terms, the economy increased from $298 billion to $347 billion in 2020-21. In dollar terms, per capita income increased from $1,666. However, the PTI-led government’s economy was still smaller than the PMLN-led government’s, at $357 billion in 2017-18.
With the re-basing done after ten years, the debt-to-GDP ratio has improved dramatically. Total debt and liabilities stood at 100.3 percent of GDP in 2005-6, but it has now decreased by 14% to 86.2 percent in 2020-21. The tax-to-GDP ratio has decreased from 9.6% to 8.6% of GDP.
Education spending as a proportion of GDP fell from 2% to 0.5 percent, and health spending fell from 1% to 0.5 percent. Agriculture, industrial, and service sector GDP shares in 2020-21 are revised to 24 percent, 19.5 percent, and 56.6 percent, respectively, compared to 23 percent, 20.9 percent, and 56 percent in 2015-16.
Because the overall size of the economy increased in both dollar and rupee terms, the current account deficit and the budget deficit will both improve. From the fiscal year 2005-6 to 2015-16, the re-basing of the economy replaced the base year after a ten-year period. The Pakistan Bureau of Statistics (PBS) conducted surveys of several sectors in order to capture economic activity, and the World Bank (WB) endorsed this effort.
“Yes, we did over 46 surveys to capture real economic activity, while the private sector education study was completed separately, and the results showed a near-50 percent improvement.” When The News contacted Chief Statistician Pakistan Bureau of Statistics (PBS) Dr Naeem Ul Zafar for response on Thursday, he stated, “We also conducted a separate survey related to private TV channels and cable/internet services.”
In this re-basing process, however, the PBS was unable to undertake a livestock census. In addition, the government chose to implement a petroleum development levy (PDL) as part of the new re-basing of indirect taxes.
When questioned why the GDP growth for the fiscal year 2020-21 went from 3.94 percent to 5.3 percent compared to 2005-6, official sources responded that Large Scale Manufacturing grew by over 15%, and wheat output climbed by 0.2 million tons from 27.3 million tons to 27.5 million tons.
In accordance with a tentative date to positive growth, the electricity sector’s growth became negative, therefore all of these sectors contributed to the GDP growth of 5.3 percent for 2020-21. When it is finalized in May 2021-22, there may be a little change in GDP growth. The PBS completed the re-basing exercise using 60 to 70 percent of the data available for 2021-22.
From prior provisional estimates of $298 billion, the economy now has a size of $347 billion for fiscal 2020-21. National accounts were re-based in 1980-81, then again in 2000 and 2005-6, and finally in 2015-16. The 2005-6 exercise was carried out in 2007-8. Now, the 2015-16 base year is being adopted in 2021-22.
Dr. Ashfaque Hassan Khan, a famous economist, said it was a normal exercise aimed at completely capturing new sectors of the economy when approached. He claimed that during a Macroeconomic Group meeting, he had asked Prime Minister Imran Khan to release the re-basing of national accounts because he knew the exercise had been completed and that it should be shared.
What are the three different types of GDP?
- The monetary worth of all finished goods and services produced inside a country during a certain period is known as the gross domestic product (GDP).
- GDP is a measure of a country’s economic health that is used to estimate its size and rate of growth.
- GDP can be computed in three different ways: expenditures, production, and income. To provide further information, it can be adjusted for inflation and population.
- Despite its shortcomings, GDP is an important tool for policymakers, investors, and corporations to use when making strategic decisions.
Is a higher or lower GDP preferable?
Gross domestic product (GDP) has traditionally been used by economists to gauge economic success. If GDP is increasing, the economy is doing well and the country is progressing. On the other side, if GDP declines, the economy may be in jeopardy, and the country may be losing ground.
What are the three methods for calculating GDP?
The value added approach, the income approach (how much is earned as revenue on resources utilized to make items), and the expenditures approach can all be used to calculate GDP (how much is spent on stuff).
What is an example of GDP?
The Gross Domestic Product (GDP) is a metric that measures the worth of a country’s economic activities. GDP is the sum of the market values, or prices, of all final goods and services produced in an economy during a given time period. Within this seemingly basic concept, however, there are three key distinctions:
- GDP is a metric that measures the value of a country’s output in local currency.
- GDP attempts to capture all final commodities and services generated within a country, ensuring that the final monetary value of everything produced in that country is represented in the GDP.
- GDP is determined over a set time period, usually a year or quarter of a year.
Computing GDP
Let’s look at how to calculate GDP now that we know what it is. GDP is the monetary value of all the goods and services generated in an economy, as we all know. Consider Country B, which exclusively produces bananas and backrubs. In the first year, they produce 5 bananas for $1 each and 5 backrubs worth $6 each. This year’s GDP is (quantity of bananas X price of bananas) + (quantity of backrubs X price of backrubs), or (5 X $1) + (5 X $6) = $35 for the country. The equation grows longer as more commodities and services are created. For every good and service produced within the country, GDP = (quantity of A X price of A) + (quantity of B X price of B) + (quantity of whatever X price of whatever).
To compute GDP in the real world, the market values of many products and services must be calculated.
While GDP’s total output is essential, the breakdown of that output into the economy’s big structures is often just as important.
In general, macroeconomists utilize a set of categories to break down an economy into its key components; in this case, GDP is equal to the total of consumer spending, investment, government purchases, and net exports, as represented by the equation:
- The sum of household expenditures on durable commodities, nondurable items, and services is known as consumer spending, or C. Clothing, food, and health care are just a few examples.
- The sum of spending on capital equipment, inventories, and structures is referred to as investment (I).
- Machinery, unsold items, and homes are just a few examples.
- G stands for government spending, which is the total amount of money spent on products and services by all government agencies.
- Naval ships and government employee wages are two examples.
- Net exports, or NX, is the difference between foreigners’ spending on local goods and domestic residents’ expenditure on foreign goods.
- Net exports, to put it another way, is the difference between exports and imports.
GDP vs. GNP
GDP is just one technique to measure an economy’s overall output. Another technique is to calculate the Gross National Product, or GNP. As previously stated, GDP is the total value of all products and services generated in a country. GNP narrows the definition slightly: it is the total value of all goods and services generated by permanent residents of a country, regardless of where they are located. The important distinction between GDP and GNP is based on how production is counted by foreigners in a country vs nationals outside of that country. Output by foreigners within a country is counted in the GDP of that country, whereas production by nationals outside of that country is not. Production by foreigners within a country is not considered for GNP, while production by nationals from outside the country is. GNP, on the other hand, is the value of goods and services produced by citizens of a country, whereas GDP is the value of goods and services produced by a country’s citizens.
For example, in Country B (shown in ), nationals produce bananas while foreigners produce backrubs.
Figure 1 shows that Country B’s GDP in year one is (5 X $1) + (5 X $6) = $35.
Because the $30 from backrubs is added to the GNP of the immigrants’ home country, the GNP of country B is (5 X $1) = $5.
The distinction between GDP and GNP is theoretically significant, although it is rarely relevant in practice.
GDP and GNP are usually quite close together because the majority of production within a country is done by its own citizens.
Macroeconomists use GDP as a measure of a country’s total output in general.
Growth Rate of GDP
GDP is a great way to compare the economy at two different times in time. This comparison can then be used to calculate a country’s overall output growth rate.
Subtract 1 from the amount obtained by dividing the GDP for the first year by the GDP for the second year to arrive at the GDP growth rate.
This technique of calculating total output growth has an obvious flaw: both increases in the price of products produced and increases in the quantity of goods produced result in increases in GDP.
As a result, determining whether the volume of output is changing or the price of output is changing from the GDP growth rate is challenging.
Because of this constraint, an increase in GDP does not always suggest that an economy is increasing.
For example, if Country B produced 5 bananas value $1 each and 5 backrubs of $6 each in a year, the GDP would be $35.
If the price of bananas rises to $2 next year and the quantity produced remains constant, Country B’s GDP will be $40.
While the market value of Country B’s goods and services increased, the quantity of goods and services produced remained unchanged.
Because fluctuations in GDP are not always related to economic growth, this factor can make comparing GDP from one year to the next problematic.
Real GDP vs. Nominal GDP
Macroeconomists devised two types of GDP, nominal GDP and real GDP, to deal with the uncertainty inherent in GDP growth rates.
- The total worth of all produced goods and services at current prices is known as nominal GDP. This is the GDP that was discussed in the previous parts. When comparing sheer output with time rather than the value of output, nominal GDP is more informative than real GDP.
- The total worth of all produced goods and services at constant prices is known as real GDP.
- The prices used to calculate real GDP are derived from a certain base year.
- It is possible to compare economic growth from one year to the next in terms of production of goods and services rather than the market value of these products and services by leaving prices constant in the computation of real GDP.
- In this way, real GDP removes the effects of price fluctuations from year-to-year output comparisons.
Choosing a base year is the first step in computing real GDP. Use the GDP equation with year 3 numbers and year 1 prices to calculate real GDP in year 3 using year 1 as the base year. Real GDP equals (10 X $1) + (9 X $6) = $64 in this situation. The nominal GDP in year three is (10 X $2) + (9 X $6) = $74 in comparison. Because the price of bananas climbed from year one to year three, nominal GDP grew faster than actual GDP during this period.
GDP Deflator
Nominal GDP and real GDP convey various aspects of the shift when comparing GDP between years. Nominal GDP takes into account both quantity and price changes. Real GDP, on the other hand, just measures changes in quantity and is unaffected by price fluctuations. Because of this distinction, a third relevant statistic can be calculated once nominal and real GDP have been computed. The GDP deflator is the nominal GDP to real GDP ratio minus one for a particular year. The GDP deflator, in effect, shows how much of the change in GDP from a base year is due to changes in the price level.
Let’s say we want to calculate the GDP deflator for Country B in year 3 using as the base year.
To calculate the GDP deflator, we must first calculate both nominal and real GDP in year 3.
By rearranging the elements in the GDP deflator equation, nominal GDP may be calculated by multiplying real GDP and the GDP deflator.
This equation displays the distinct information provided by each of these output measures.
Changes in quantity are captured by real GDP.
Changes in the price level are captured by the GDP deflator.
Nominal GDP takes into account both price and quantity changes.
You can break down a change in GDP into its component changes in price level and change in quantities produced using nominal GDP, real GDP, and the GDP deflator.
GDP Per Capita
When describing the size and growth of a country’s economy, GDP is the single most helpful number. However, it’s crucial to think about how GDP relates to living standards. After all, a country’s economy is less essential to its residents than the level of living it delivers.
GDP per capita, calculated by dividing GDP by the population size, represents the average amount of GDP received by each individual, and hence serves as an excellent indicator of an economy’s level of life.
The value of GDP per capita is the income of a representative individual because GDP equals national income.
This figure is directly proportional to one’s standard of living.
In general, the higher a country’s GDP per capita, the higher its level of living.
Because of the differences in population between countries, GDP per capita is a more relevant indicator for measuring level of living than GDP.
If a country has a high GDP but a large population, each citizen may have a low income and so live in deplorable circumstances.
A country, on the other hand, may have a moderate GDP but a small population, resulting in a high individual income.
By comparing standard of living among countries using GDP per capita, the problem of GDP division among a country’s residents is avoided.
Is it beneficial to have a high debt-to-GDP ratio?
- The debt-to-GDP ratio is the proportion of a country’s total debt to its total GDP (GDP).
- The debt-to-GDP ratio can also be thought of as the number of years it would take to repay debt if GDP were used as a measure of payback.
- The greater the debt-to-GDP ratio, the less likely the country is to repay its debt and the greater the chance of default, which might generate financial panic in domestic and international markets.