<p>Really confused by this. Say debt burdens increase and country A now has to spend more of its income towards servicing its debt to country B, causing a fall in consumption. Country B now has more money to spend on buying goods and services from A though which should make up for the fall in consumption in A by increasing exports, leaving GDP unchanged.</p>
<p>Obviously that’s not what has happened in debt crises like the Greek one as GDP has fallen dramatically so what exactly am I missing?</p>

CC BY-SA 4.0
2022-09-15T16:11:16.933Z
It's probably a bad assumption that B's imports from A increase by the amount  of the increase in debt of A multiplied by the interest rate.  Are you assuming a simplified economy where B is the rest of the world that is not A?  Are you assuming that country C exists or that other countries exist?  B can import more from C.  Are you assuming B cannot borrow from C ?
H2ONaCl
CC BY-SA 4.0
2022-09-15T16:11:34.540Z
Too much for one comment so I'm continuing here...  It's also a bad assumption that B's imports from A is constrained by the interest payment (and in the non-steady state, the principle repayment). The debt service cash flows of A do not necessarily increase when the debt burden increases. For example A can simply stop paying.
H2ONaCl
<macroeconomics><international-economics><debt><balance-of-payments>
How does high external debt hurt GDP?
ThomasJ
# How does high external debt hurt GDP?

(Asked by: username_0 on 2022-09-14)

Really confused by this. Say debt burdens increase and country A now has to spend more of its income towards servicing its debt to country B, causing a fall in consumption. Country B now has more money to spend on buying goods and services from A though which should make up for the fall in consumption in A by increasing exports, leaving GDP unchanged.

Obviously that’s not what has happened in debt crises like the Greek one as GDP has fallen dramatically so what exactly am I missing?

**Tags:** macroeconomics, international-economics, debt, balance-of-payments

> **Comments:**
> **username_1**: It's probably a bad assumption that B's imports from A increase by the amount  of the increase in debt of A multiplied by the interest rate.  Are you assuming a simplified economy where B is the rest of the world that is not A?  Are you assuming that country C exists or that other countries exist?  B can import more from C.  Are you assuming B cannot borrow from C ?  
> **username_1**: Too much for one comment so I'm continuing here...  It's also a bad assumption that B's imports from A is constrained by the interest payment (and in the non-steady state, the principle repayment). The debt service cash flows of A do not necessarily increase when the debt burden increases. For example A can simply stop paying.  

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## 0 answers

