Gross Domestic Product = GDP = C + I + G + (X - M)
where:
- C = Consumption (spending by households on goods and services)
- I = Investment (business investments in capital goods, residential construction, and inventories)
- G = Government Spending (expenditures on goods and services by the government)
- X = Exports (goods and services sold to other countries)
- M = Imports (goods and services bought from other countries)
A high GDP means debt is less burdensome relative to the size of the economy, making it more manageable as a growing economy increases a country’s ability to service and pay off debt.
Higher Revenue: With a larger GDP, the government collects more in taxes without raising tax rates, giving it more funds to cover debt interest and other expenses.
Lower Debt-to-GDP Ratio: Debt is often measured as a percentage of GDP. If GDP grows faster than debt, the debt-to-GDP ratio decreases, signaling a healthier fiscal position.
Investor Confidence: High GDP growth reassures investors that the economy is strong, reducing borrowing costs (interest rates) on government debt and making debt more sustainable.