Country A has an overall government budget deficit of $140 million, nominal GDP
ID: 1124921 • Letter: C
Question
Country A has an overall government budget deficit of $140 million, nominal GDP of $1000 million, and total government debt equal to $500 million. Nominal GDP is growing at an annual rate of 0.04.
Country B has an overall government budget deficit of $110 million, nominal GDP of $1000 million, and total government debt equal to $100 million. Nominal GDP is growing at an annual rate of 0.09.
The change in the debt-GDP ratio of country A equals?
The change in the debt-GDP ratio of country B equals?
Please go step-by-step. Thank you!
Explanation / Answer
Question 1). Solution :- Debt-GDP Ratio = Government debt / Nominal GDP.
Change in Debt-GDP ratio of Country A = Decrease by 0.02 (0.50 - 0.48).
(Nominal GDP of Country A after the growth = 1000 Million + 4 % of 1000 Million = $ 1040 Million)
Question 2). Solution :- Debt-GDP Ratio = Government debt / Nominal GDP.
Change in Debt-GDP ratio of Country B = Decrease by 0.91 (1.00 - 0.09).
(Nominal GDP of Country B after the growth = 1000 Million + 9 % of 1000 Million = $ 1090 Million)
Conclusion :-
Country A Debt-GDP Ratio i). Before growth in Nominal GDP 500 Million / 1000 Million = 0.50 ii). After growth in Nominal GDP 500 Million / 1040 Million = 0.48