Question

what does debt to GDP ratio mean? Contrast China's debt to GDP ratio to that of the United States

Answer 1

GDP to debt ratio measures the ability of a government to be able to repay its public borrowings. Generally, for accelerating the current growth, the government chooses to take a debt from financial institutions such as the International Monetary Fund or the World bank or from the general public by issuing government bonds. When we compare this debt as a measure of the Gross Domestic Product of the country, we can calculate the GDP to debt ratio of a country. For example, if an economy has a GDP or final value of goods and services valued at around 10 Million Dollars and the overall debt is 5 Million Dollars, then the GDP to debt ratio can be said to be at 50%.

When we compare the GDP to debt ratio of two of the biggest giants which are China and the United States of America, we see that that of China is around 50-55% whereas that of the United States is pegged at around 100-105%. This means that China can pay its debts with half of its total GDP whereas, the United States requires more than 100% of its GDP to be able to repay its debt.

Here, it is important to know, that most economists believe that a ratio of less than 60% is extremely good for any developed economy as it indicates higher financial stability and the ability to repay the debt as and when required. The United States in this regard even though it has a higher overall GDP when compared to China, but the debt component remains higher. This indicates that China is relatively less exposes to credit than the United States of America.

Thus, we can conclude by saying that the GDP to Debt Ratio, is a measure of a countries paying capacity with regards to the debt which it owes to the public or to other financial institutions and that of China is half of what is of the United States indicating better financial health.

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