What is the difference between government expenditures and government purchases PDF

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Unit five assignment ...

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Unit- 5, Problems University of the People

Instructor: Felicia Thomas

Cours: BUS 1104 - AY2021-T2

Group- 0004

1. What is the difference between government expenditures and government purchases? How do the two variables differ in terms of their effect on GDP? Government expenditures is the sum of government purchases and government transfer payments. Government purchases is federal state and local government purchases. (Econmentor, 2014). Or government purchases are basically a part of govt expenditure. The purchases are usually made from govt and private agencies. For example, if government buys food from market for any purpose, then it is a govt purchase. Even money invested in colleges and universities is also counted under govt purchases. However, transfer payments such as unemployment benefits are not govt purchases. The effect of govt expenditure due to its sheer size is much larger on GDP than govt purchases. More importantly, government purchases often result in creation of production capacity which may not be the case with govt purchases. (Laurence, 1982)

2. Crowding out reduces the degree to which a change in government purchases influences the level of economic activity. Is it a form of automatic stabilizer? I would say that is not a form of automatic stabilizer because  

It is not a government program It is to reduce the impact of changes in fiscal policy, it doesn't insulate the economy from other shocks.

Or: Automatic stabilizer can be defined as the changes which occur in the economic system due to auto-correction mechanisms. Crowding out can be defined as a situation where due to an increase in the government spending and raising interest rates the investment by business and the personal consumption of goods and services are reduced. (Economics Online, 2020) Giving that crowding out reduces the degree to which a change in government purchases influences the level of economic activity. Hence, by the above definitions it can be said that crowding out is not a form of automatic stabilizer.

3. Why is it important to try to determine the size of the fiscal policy multiplier? Multipliers play an important role in economic growth. A well-developed fiscal policy would work only through the multiplier effect that is generated by an initial disturbance. It is affected by the government spending. It is particularly important to determine the size of the multiplier because it determines the shift of the aggregate demand curve which further determines the output and price level in the economy. (Mendoza, Vegh, & Ilzetzki, 2009). The size of the multiplier also helps in determining the current state of economy. Like if the economy is working close to full employment, an increase in demand would lead to smaller multiplier.

References: Econmentor. 2014. Difference between government expenditure and government purchases. Macroeconomics. Retrieved from: Econmentor.com - Difference between government expenditure and government purchases Laurence. J. K. 1982. The Economic Effects of Government Expenditures. National Bureau of Economic Research. Retrieved from: The Economic Effects of Government Expenditures | NBER Economics Online. 2020. Crowding out. Economics Online for Students of Economics. Retrieved from: Crowding out theory - effects of expansion of public sector | Economics | Economics Online Mendoza, E., Vegh, C., & Ilzetzki, E. (2009, October 1). How big are fiscal multipliers? New evidence from new data. Https://Voxeu.Org/Article/Determining-Size-Fiscal-Multiplier. https://voxeu.org/article/determining-size-fiscal-multiplier...