I know the formula Debt to GDP ratio = Debt : GDP I have debt quarterly data and GDP (yearly and quarterly). The one that make me confuse is, when i use Debt Q1 2014, for example it wont match with GDP (since GDP is only for 3 months January-March). What type or Which GDP date should i use as denominator, GDP Q4 2013, or GDP Q4 2014?
Debt is a stock variable, measured in dollars. (I will use “dollars” for the local currency for simplicity.)
GDP is a flow, with units of dollars per accounting period.
These two concepts are different, and so any ratio is a convention, without any “correct” answer.
Let’s assume that we want to follow the usual convention, and divide the stock of debt by the GDP generated during time it takes for the Earth to go around the sun. There are a number of standard ways of doing this.
- Take the debt level at the end of the year, divide by the total of GDP for the same year (sum of four quarters). This gives us an annual series.
- For any quarter, take the debt at the end of the quarter, and divide by the rolling 4-quarter sum of GDP.
- For any quarter, take the debt at the end of the quarter, and divide by the annualized quarterly GDP.
One could imagine even more alternatives, such as comparing the average level of debt in the year to annual GDP.
You just choose one, and explain your choice.