Debt Levels and Flows - Measuring Debt

Measuring Debt

In measuring debt, stocks and flows are both of interest: stocks are amounts, levels of debt (e.g., $100) and have units of currency (such as US Dollars), while flows are changes in levels – in calculus terms, the derivative – (e.g., $10/year), and have units of currency/time (such as US Dollars/Year).

In order to make these stock and flows comparable between countries and across time, one may normalize these by some measure of the size of the country's economy, most often GDP, that is, compute the debt to GDP ratio. For instance, $10 billion in 2000 is a small amount of debt relative to the size of the economy of the United States, but large relative to the size of the economy of Iceland, and dividing by the GDP reflects this.

Because GDP is generally quoted with units of currency/year, and debt levels have units of currency, the debt level/GDP ratio has units of years, which may be interpreted as "how many years it would take to repay the debt if all income went to debt repayment". In practice this cannot happen – some of GDP must go to survival – and historically debt repayment rates during periods of repayment have been about 4%–10% of GDP (as in the United States during the Great Depression and World War II), so practical time to repay debt is rather Debt/GDP times 10–25.