Question

Suppose that a country has no public debt in year 1 but experiences a budget deficit of $40 billion in year 2, a budget deficit of $20 billion in year 3, a budget surplus of $10 billion in year 4, and a budget deficit of $2 billion in year 5.

(a) What is the absolute size of its public debt in year 5?

(b) If its real GDP in year 5 is $104 billion, what is this country’s public debt as a percentage of real GDP in year 5?

Answer 1

Public debt: it is the borrowings by government from external and internal sources

We can calculate public debt by deducting cumulative budget deficit by cumulative budget surplus

(a) The absolute size of its public debt in year 5 is:

Public debt = all past deficits – surpluses

= ($40 + $20 + $ 2) - $10

= $62- $10

= $ 52

So , the absolute size of its public debt is year 5 is $52 billion

(b) If its real GDP in year 5 is $ 104 billion than the country’s public debt as a percentage of real GDP in year 5 will be :

The formula will be = public debt of year 5 / real GDP in year 5 *100

= $52/ $104 *100

= 50%

So , the country’s public debt as a percentage of real GDP in year 5 is 50%      

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