Essentials of Economics
Essentials of Economics
4th Edition
ISBN: 9781464186653
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
Question
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Chapter 17, Problem 11P
To determine

Concept Introduction:

Gross Domestic Product (GDP): It refers to gross money value or gross market value of all the finished goods and services produced by resident and non-resident people of a country that is within the borders of the country in an accounting year.

Expert Solution & Answer
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Explanation of Solution

Formula to calculate debt percent of real GDP:

    Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  1

Formula to calculate budget deficit percent of real GDP:

    Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  2

a. Government budget deficit remains constant.

Given:
Budget deficit is constant at $30 per year.

    YearReal GDP(billions $)Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  3Debt(billions $)Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  4Budget Deficit(billions $)Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  5Debt % of Real GDP(%)Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  6Budget Deficit% of Real GAP(%)Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  7
    2014 1,000 300 30 30 3
    2015 1,030 309 30 30 2.91
    2016 1,061 318.3 30 30 2.82
    2017 1,093 328 30 30 2.74
    2018 1,126 337 30 30 2.66
    2019 1,159 347.7 30 30 2.58
    `2020 1,194 358.2 30 30 2.51
    2021 1,230 369 30 30 2.43
    2022 1,267 380 30 30 2.36
    2023 1,305 391.5 30 30 2.29
    2024 1,344 403.2 30 30 2.23

Conclusion:

Thus, the table is completed.

b. Government budget deficit grows by 3%.

Given:
Government budget deficit grows by 3% per year.

    YearReal GDP(billions $)Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  8Debt(billions $)Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  9Budget Deficit(billions $)Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  10Debt % of Real GDP(%)Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  11Budget Deficit% of Real GAP(%)Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  12
    2014 1,000 300 30 30 3
    2015 1,030 309 30.9 30 3
    2016 1,061 318.3 31.8 30 2.99
    2017 1,093 328 32.7 30 2.99
    2018 1,126 337 33.6 30 2.98
    2019 1,159 347.7 34.6 30 2.98
    2020 1,194 358.2 35.6 30 2.98
    2021 1,230 369 36.6 30 2.97
    2022 1,267 380 37.6 30 2.96
    2023 1,305 391.5 38.7 30 2.96
    2024 1,344 403.2 39.8 30 2.96

Conclusion:

Thus, the debt-GDP ratio and ratio of the budget deficit is calculated.

c. Government budget deficit grows by 20%.

Given:

Government budget deficit grows by 20% per year.

    YearReal GDP(billions $)Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  13Debt(billions $)Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  14Budget Deficit(billions $)Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  15Debt % of Real GDP(%)Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  16Budget Deficit% of Real GAP(%)Essentials of Economics, Chapter 17, Problem 11P , additional homework tip  17
    2014 1,000 300 30 30 3
    2015 1,030 309 36 30 3.49
    2016 1,061 318.3 43.2 30 4.07
    2017 1,093 328 51.8 30 4.73
    2018 1,126 337 62.2 30 5.52
    2019 1,159 347.7 74.6 30 6.43
    2020 1,194 358.2 89.6 30 7.50
    2021 1,230 369 107.5 30 8.73
    2022 1,267 380 128.9 30 10.17
    2023 1,305 391.5 154.7 30 11.85
    2024 1,344 403.2 185.7 30 13.81

Conclusion:

Thus, the debt-GDP ratio and ratio of the budget deficit is calculated.

d. Debt-GDP ratio.

  • In part a, the budget deficit is constant so the debt-GDP ratio is 0.3 and deficit to GDP ratio is 0.03.
  • In part b, the budget deficit increases by 3% so the debt-GDP ratio is 0.3 and in part c. the budget deficit increases by 20% so the debt-GDP ratio is 0.3.

Conclusion:

Thus, debt-GDP ratio remains the same in every case.

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