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| Using Real GDP, the result is 16494.2 |
Suppose they don't give you real GDP. How do you do it then?
One way, the way that makes sense to me, is to use the deflator and figure the real values yourself. Then you add up the last ten values and divide by 10.
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| Converting Nominal GDP, the result is 16494.1 Okay, so there is a rounding error. |
But maybe there is another way: Take the nominal values they give you, add up the last ten values and divide by ten, and then convert from nominal to real. To do the conversion you just use the deflator for the most recent year. That would work, right?
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| Using the Most Recent Deflator Value, the result is 15441.3 |
Nope. Do it this way and you get the wrong answer.
And yet, people figure real debt this way.
2 comments:
I think it just depends on what you're trying to do.
If the question is something like: "how much of a burden is the debt, at each year?" or "how hard would it have been to pay off the debt, at each year?", then, I think you have to use the deflator for that year.
But if the question is something like: "during which years or administrations did the debt grow the most?" -- then, you should deflate the deficit for each year using its own deflator, then add those up. Which I think is what you're doing.
I think it's like: do we want to look at the real debt? or the sum of the real deficits? (They're not the same thing, even though they sort of sound like they should be.)
Jerry, I agree with just about everything you said. I agree that how we evaluate debt depends on what we want to find out. I agree that the two directions of inquiry are
a. the burden or difficulty paying off debt; and
b. the measurement of debt growth and its consequences.
And I agree that for measuring growth, each year's deficit must be deflated by its own deflator.
I disagree with using one year's deflator to deflate one year's reported debt, because one year's debt is a multi-year accumulation. When you deflate last year's balance due using this year's deflator, you create an error that is equal to the "erosion" of last year's debt due to inflation.
If you deflate this year's reported debt using this year's deflator, you create an error that is equal to the sum of the erosion of the prior years' balances that are accumulated within that debt.
Fortunately, you don't need to deflate debt using one year's deflator value. You can just use nominal values when your inquiry is the burden or difficulty paying off debt. (Note that when you use one year's deflator to deflate one year's reported debt, real debt divided by real GDP is equal to nominal debt divided by nominal GDP. So you can skip the real calculations, and just use the nominals.)
Related to this point of disagreement, you say "the real debt" and "the sum of the real deficits" are "not the same thing, even though they sort of sound like they should be." In response I have to say this: If nominal debt and the sum of nominal deficits are the same thing, then real debt and the sum of real deficits must be the same thing.
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