## Friday, October 25, 2013

### The Arithmetic of GDP and Debt

Below are links to an Excel workbook with two worksheets that have models to explain the relationship between GDP growth and growth in the National Debt, regarding only the arithmetic in relating the two.  There are no policy implications in this exercise as the models are far too simple to derive any policy implications from them.  The purpose of each model is purely educational, to get people to appreciate this arithmetic.  So much of what you hear in the news - pronouncements by lawmakers and pundits alike - seems ill considered or simply uninformed by knowledge of this sort of arithmetic.  So you might consider this demonstration as a prelude to a policy discussion, to bring the latter to a higher level.

There are two videos as well - voice over of screen captures where each model is explained and manipulated.  The videos are meant as encouragement for people to play with the model themselves.  The videos are probably best watched at full screen, so the viewer gets a better sense of what working in Excel is like.

This play is done by pressing the various spin buttons and thereby changing the associated parameter values and then eyeballing the impact of the changes in the graphs.  The hope is that one can get a reasonable feel of what is going on by exploring each model in this way.  The user is not taxed in doing paper and pencil calculations to understand this, so the entry level requirement of making sense of what is going on here is pretty low.

For those who do want to see the math - there is a text based explication of the model to the right and the various series that are plotted in the graphs are given below the controls, so one can learn how those series are generated by simply selecting a cell within a particular series and seeing the formula in the formula bar that is associated with that cell.  The entire workbook can be re-engineered in this way.

Excel Workbook

First Video on the Simple Model

Second Video on the Model with Business Cycles