And thinking about the size of a country's national debt.
The first thing we want to do is to establish a benchmark of comparison.
So with a drum roll please,
let's roll out the yardstick of the debt to GDP ratio.
The reason economists like to compare the size of
a nation's public debt to its gross domestic product is simple.
In the abstract, a $5 trillion national debt,
is a very large number.
However, such a debt would pose
a far more crushing burden to a small nation such as Thailand,
than it does to say,
the United States or China.
Accordingly, comparing the debt to the GDP
gives us a measure of a nation's ability to produce,
and therefore its ability to pay off its debt.
It's not just the debt to GDP ratio that we have to
think about when assessing the nation's debt burden.
It's also important to distinguish between the real and nominal budget deficits.
This distinction is important,
because it allows us to measure how inflation in
any given year actually reduces the effective burden of the debt.
To see this critical key point,
let's define our terms,
and then do an example.
The real deficit in any given year,
is the actual or nominal deficit,
adjusted for inflation's effect on the debt.
In particular, the real deficit equals the nominal deficit,
minus the inflation rate,
times the total debt.
The key concept here is that while a country
may add to its budget deficit in any given year,
inflation in that year,
will erode the value and therefore the burden of the total debt.
So, if the nominal deficit in your country is $100 billion,
inflation is 10%, and the total debt is $5 trillion,
what's the real deficit?
