Chapter 15 - Deficits and debt. After reading this chapter, you should be able to: Define the terms deficit, surplus, and debt and distinguish between a cyclical deficit and a structural deficit; differentiate between real and nominal deficits and surpluses; explain why the debt needs to be judged relative to assets; describe the historical record for the U.S. deficit and debt.
Trang 1Thinking Like an Economist
CHAPTER 15
Any government, like any family, can for a year spend a little more than it earns. But you and I know that a continuance of that habit means the poorhouse.
―Franklin D. Roosevelt
Deficits and Debt
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Chapter Goals
Ø Define the terms deficit, surplus, and debt and distinguish
between a cyclical deficit and a structural deficit
Ø Differentiate between real and nominal deficits and
surpluses
Ø Explain why the debt needs to be judged relative to assets
Ø Describe the historical record for the U.S deficit and debt
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Defining Deficits and Surpluses
Ø A deficit is a shortfall of revenues under payments
Ø A surplus is an excess of revenues over payments
Ø In the short run, if the economy is below potential,
deficits are good because deficits increase
expenditures moving output closer to potential
Ø Long-run surpluses are good because they provide
saving for investment
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Financing the Deficit
Ø The government finances its deficits by selling bonds to
private individuals and to the central bank
Ø Bonds are promises to pay back the money in the future
Ø The central bank can print an unlimited amount of money
to buy bonds, but printing too much money can cause serious inflation
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Arbitrariness in Defining Surpluses and
Deficits
Ø Whether a nation has a deficit or surplus depends on
what is included as revenues and expenditures
Ø There are many ways to measure expenditures and
receipts, so there are many ways to measure deficits and surpluses
Ø Deficit and surplus figures are summary measures of
the financial health of the economy
Ø To understand the summary, you must understand the
methods that were used to calculate it
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Structural and Cyclical Deficits and Surpluses
Ø Many government revenues and expenditures depend
on the level of income in the economy
Ø Structural deficit is the part of the budget deficit that
would exist even if the economy were at its potential level of output
Ø Cyclical deficit is the part of the deficit that exists
because the economy is operating below its potential level of output
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Structural and Cyclical Deficits and Surpluses
Ø There is disagreement about what percentage of a
deficit is structural and what percentage is cyclical
Ø Actual deficit = structural deficit + cyclical deficit
Ø Cyclical deficit = tax rate x (potential – actual output)
Ø Structural deficit = actual deficit – cyclical deficit
Ø Much of the current deficit is structural and will have to
continue to keep the economy where it is today;
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Nominal and Real Deficits and Surpluses
Ø A nominal deficit is the difference between expenditures
and receipts
Ø A real deficit is the nominal deficit adjusted for inflation
Ø Inflation reduces the value of the debt
Ø Real deficit = Nominal deficit – (Inflation x Total debt)
Ø Lowering the real deficit by inflation is not costless to the
government
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Defining Debt and Assets
Ø Debt is accumulated deficits minus accumulated
surpluses
• Debt is a stock, defined at a point in time
Ø Deficits and surpluses are flow concepts, defined for a
period of time
Ø If a country has more surpluses than deficits, the
accumulated surpluses minus accumulated deficits are
a part of its assets
Ø The U.S Treasury must sell new bonds to pay for a
deficit and refinance previously issued bonds as they
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Debt Management
Ø Debt, as a summary measure of a nation’s financial
situation, needs to be judged in relation to a
nation’s assets
Ø When the government runs a deficit, it might be
spending on projects that increase its assets
Ø If the assets are valued at more than their costs,
then the deficit is making society better off
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Difference Between Individual and Government Debt
1. The government lives forever; people don’t
2. The government can print money to pay its debt;
people can’t
3. Government owes much of its debt to itself (to its own
citizens)
• Internal debt is government debt owed to other
governmental agencies or to its own citizens
• External debt is government debt owed to
individuals in foreign countries
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U.S Budget Deficits as Percentage of GDP
Deficits as
percentage of GDP
10
0
-10
-20
Deficits and debt relative to GDP provide measures of a country’s ability
to pay off a deficit and service its debt
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U.S Debt as Percentage of GDP
Debt as
Percentage of GDP
100
75
50
25
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Chapter Summary
Ø A deficit is a shortfall of revenues under payments
Ø A surplus is the excess of revenues over payments
Ø Debt is accumulated deficits minus accumulated surpluses
Ø Deficits and surpluses are summary measures of a budget
Ø A cyclical deficit is that part of the deficit that exists because the economy is below or above potential output
A structural deficit is that part of a budget deficit that would
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Chapter Summary
Ø A real deficit is a nominal deficit adjusted for the effect of inflation
Ø A country’s debt must be judged in relation to its assets
Ø Government debt and individual debt differ
Ø Deficits, surpluses, and debt should be viewed relative to GDP because this ratio better measures the government’s ability to handle the deficit and pay off the debt
Ø Since 2008, the U.S has run significant deficits and the
debt-to-GDP ratio has risen to over 100 percent