AP_Krugman_Textbook

302 section 6 Inflation, Unemployment, and Stabilization Policies

40%

30

20

10

0

–10

Budget deficit

(percent

of GDP)

Public

debt (percent

of GDP)

Year Year

1940 1950 1960 1970 1980 1990 20002009 1940 1950 1960 1970 1980 1990 20002009

(a) The U.S. Federal Budget Deficit Since 1940 (b) The U.S. Public Debt–GDP Ratio Since 1940

20

40

60

80

100

120%

figure 30.4 U.S. Federal Deficits and Debt

Panel (a) shows the U.S. federal budget deficit as a percentage

of GDP since 1940. The U.S. government ran huge deficits

during World War II and has usually run smaller deficits ever

since. Panel (b) shows the U.S. debt–GDP ratio. Comparing

panels (a) and (b), you can see that in many years the

debt–GDP ratio has declined in spite of government deficits.

This seeming paradox reflects the fact that the debt–GDP ratio

can fall, even when debt is rising, as long as GDP grows faster

than debt.

Source: Office of Management and Budget.

Year Year

19901992199419961998200020022004200620082009 19901992199419961998200020022004200620082009

100%

80

60

40

20

(a) The Japanese Budget Deficit Since 1990 (b) The Japanese Debt–GDP Ratio Since 1990

Budget deficit

(percent of GDP)

Public

debt (percent

of GDP)

12%

10

8

6

4

2

0

–2

–4

figure 30.5 Japanese Deficits and Debt

Panel (a) shows the budget deficit of Japan as a percent of GDP

since 1990 and panel (b) shows its debt–GDP ratio. The large

deficits that the Japanese government began running in the

early 1990s have led to a rapid rise in its debt–GDP ratio as debt

has grown more quickly than GDP. This has led some analysts

to express concern about the long -run fiscal health of the

Japanese economy.

Source: International Monetary Fund.

Still, a government that runs persistent largedeficits will have a rising debt–GDP

ratio when debt grows faster than GDP. Panel (a) of Figure 30.5 shows Japan’s

budget deficit as a percentage of GDP, and panel (b) shows Japan’s debt–GDP ratio,

both since 1990. As we have already mentioned, Japan began running large deficits

in the early 1990s, a by -product of its effort to prop up aggregate demand with