Saturday, November 21st, 2009

Why does GDP include government spending but not subtract out government debt accrual?

Government Debt
Trying2BRealistic asked:


I keep seeing the US National Debt compared against our GDP and when I looked up the definition, government spending is added in but government debt is not accounted for (assumes no debt?) Why is GDP a good measure of a country’s wealth if it does not take into account that country’s liabilities?

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2 Responses to “Why does GDP include government spending but not subtract out government debt accrual?”

Timofmars Says:
November 21st, 2009 at 10:34 pm

GDP is Gross Domestic Product. That’s a measure of the value of goods and services produced in the nation. Government purchases and services and goods produced by the government directly increases GDP. Debt accumulated does not add or subtract from the nation’s GDP.

Alvie Says:
November 25th, 2009 at 12:10 am

Perhaps GDP is a measure of economic activity rather than wealth. And that’s why GDP doesn’t take into account government debt.

Repaying this debt might decrease economic activity in the future. Because taxes will have to be raised to pay for this debt. And when this happens, then the effects of the government debt will be reflected in the decreased GDP.

Perhaps the US government is bullish on the US economy. And that’s why the government prefers to raise taxes in the future rather than now. If the US economy grows over time. Then it would be easier for people to pay higher taxes in the future than now.

But if the US economy ends up stagnating for 20 years or so, like it happened in Japan after their financial crisis. Then this government bet that paying higher taxes would be easier in the future might not turn out so well. Because without much economic growth, bigger government debts will be harder to repay in the future rather than now. The bigger the debt the more interest will have to be paid on it every year.

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