Why governments borrow & how it affects you
Learn how debt, deficits, and trade shape the economy
Key Takeaways
• National debt accumulates when government spending exceeds revenue, and excessive borrowing can limit growth by increasing interest costs.
• National income is generated by households, businesses, and the government, forming the backbone of the economy.
• Fiscal policies and annual deficits affect public spending and economic stability.
• Global trade and international market forces significantly influence domestic economic performance and everyday life.
Understanding National Debt
National debt is the total money a government owes when spending exceeds tax income and other revenues.
To cover the shortfall, it borrows by issuing bonds or taking loans, which accumulates debt over time.
While these funds finance public projects, manage downturns, and invest in infrastructure, excessive borrowing can limit a government's flexibility to address crises or fuel growth, as more resources go toward debt servicing, leading to higher interest costs and future challenges.
National Income Explained
At the core of a national economy are three main groups: households, businesses, and the government.
Households provide labor and consume goods, while businesses produce products and offer services.
The government regulates economic activity, collects taxes, and spends money on public services like roads and schools.
These groups interact in markets where prices and wages are determined, forming the backbone of the economy that influences resource allocation and wealth creation.
Government’s Role
The government influences a national economy through fiscal policies that include taxation and public spending.
Taxes collected from households and businesses fund essential services like healthcare, education, and infrastructure projects.
By adjusting tax rates and spending levels, the government can stimulate growth or curb inflation.
These decisions affect how much money is available for public projects and private investments, shaping the overall economic environment.
National Deficits
A national deficit occurs when a government's spending in a given year exceeds its revenue from taxes and other sources.
This gap forces the government to borrow money, contributing to the overall national debt.
Annual deficits serve as a snapshot of fiscal health, reflecting an imbalance in public finances.
While temporary deficits can boost growth during downturns, persistent deficits may indicate deeper economic challenges and limit future spending flexibility.