Understanding the difference between “deficit” and “debt”

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Presentation transcript:

Understanding the difference between “deficit” and “debt”

Let’s say a government spends $ 100 per year and earns 75 % per year. The difference between spends and revenue is the deficit (i.e = 25) So in the above example $25 is the deficit We can also say that for every dollar spent 25% is borrowed

So how does the government finance this deficit? It does so by borrowing the $25 needed to finance its spending. This is done by issuing “Bonds”

Then what is debt? Every year the government borrows to finance its deficit as shown in the previous slide The aggregate borrowing at any point in time is known as “DEBT” DEFICIT =DEBT

Let’s say the past debt was $1000 The deficit of $25 needs to be added to $1000 to arrive at the cumulative debt. Cumulative debt therefore is $1000+$25=$1025

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