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Chapter 27: Problem 10

In \(2017,\) an article in the Wall Street Journal discussed a report by the World Bank. According to the report, "More than half of emerging economies saw their debt-to-GDP ratios rise 10 percentage points and in a third, budget balances worsened by more than five percentage points." a. What does the report mean by "budget balances"? b. Is there a connection between these countries experiencing worsening budget balances while also experiencing increasing debt-to-GDP ratios? Briefly explain.

Short Answer

Expert verified
a. The 'budget balances' refer to the difference between a government's income and its expenses. A budget balance worsens when expenses exceed income, leading to a deficit; it improves when income exceeds expenses, leading to a surplus. b. Yes, there is a connection between the two. As countries experience worsening budget balances, they may resort to borrowing to cover their expenses, thus increasing their debt-to-GDP ratios.

Step by step solution

01

Understanding Budget Balances

The term 'budget balance' refers to the financial balance of a government (or other entity) where the income is equal to expenses. When the income exceeds the expenses, it's a budget surplus, and conversely, when expenses exceed the income, it's a budget deficit.
02

Understanding Debt-to-GDP Ratio

Debt-to-GDP ratio is an indicator of a country's governmental debt in relation to its gross domestic product (GDP). It's a measure of a country's ability to pay back its debt. The higher the debt-to-GDP ratio, the less likely the country will pay back its debt, and vice versa.
03

Analyzing the Correlation

Both 'budget balance' and 'debt-to-gdp ratio' are measures of a country's financial health. If a country has a worsening budget balance, it means it's spending more than its income. This may lead the country to borrow more to cover its deficit, thereby increasing its debt-to-GDP ratio. So, yes, there is a connection between a country experiencing a worsening budget balance and an increasing debt-to-GDP ratio.

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