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Econ 1 with John Taylor Discussion

The Debt and The Deficit

Why, when we are referring to debt, do we like to compare it to something else? What are the benefits, as just one example, of assessing U.S. debt as a debt to GDP ratio?

1.  Billions of dollars in debt in a large country with a large economy, like the United States, means much less than billions of dollars in debt in a smaller country like Switzerland. Therefore to fully understand the severity of a country’s debt we like to compare it to another factor—like GDP—to put the debt into perspective. Dividing the debt by GDP gives us a ratio that can help better explain US debt and help us accurately compare what our debt ratio is to other countries.


For larger economies, a certain level of debt is less significant than the same amount of debt in a small economy. $50,000 worth of debt is not really bad for someone who makes a million dollars a year. It would be unmanageable for someone who only makes $20,000 per year.

It is a way of adding scale to such an enormous number and allows us to compare the United States to other countries, of any size.

It provides a sense of scale, enabling comparison of economies of wildly different sizes.