2.2.4 & 2.2.5 Government Expenditure (G) & Net Trade (X-M) Flashcards
Government expenditure
all the money spent by the government e.g public goods such as defence, judiciary, health, education
Main influences on govt expenditure
- the trade (economic) cycle
- fiscal policy
- type of economy
- fiscal debt/financing/budget
Types of govt spending
- transfer payments
- public services
- capital spending/state investment
Types of govt spending (transfer payments)
The govt enacts a transfer from. One group of taxpayers, to another (eg job seekers allowance)
Types of govt spending (public services)
Current spending
- e.g salaries of NHS, road maintenance
Types of govt spending (capital spending)
E.g Hs2
Significance of government spending
- a key component of AD
- important in providing public and merit goods
- can impact household income/distribution. Govt can help achieve greater equity
National debt is damaging
- high and rising stock
- higher taxes & bond interest rates can ‘crowd out’ the private sector
- big state spending and borrowing = wasteful
National debt is damaging (high and rising stock)
- increased future taxes (current borrowing/debt = tomorrow taxes & is expensive to service
National debt is damaging (crowd out)
- higher taxes & bond interest rates can ‘crowd out’ the private sector
- increased govt borrowing = increased interest rates in debt markets (e.g bond yields)
- thereby increasing borrowing costs on loans 4 other participants in the economy
(See ipad photo and graph)
Benefits of govt borrowing
- Govt borrowing is required to fund investment
- Automatic stabilisers
- Better transport
- see photo on ipad
theory of crowding out
- rise in public sector borrowing and debt might have th effect of crowding out investment in the private sector
- the theory rests on the financing impact of an increase in govt borrowing either through bond issues or via higher taxes
- fiscal conservatives argue: govt borrowing and debt therefore needs to be controlled to keep market interest rates and taxes low
- this then frees up scarce resources for the (dynamic) private sector to invest and grow
Is a high level of national debt a concern?
- depends in part on the root causes (cyclical or structural)
- depends on the ability of govt to attract investors to buy new debt
- depends on value judgements about how best to fund public services and welfare & which generations should bear the cost of doing this
Free market
prices are determined by unrestricted competition between privately owned firms (less govt spending)
Mixed economy
an economic system combining private & state enterprise (some govt spending)
Command economy
production is publicly owned and economic activity is controlled by a government (high govt spending)
How does the trade cycle affect govt expenditure?
- recession phases = neg economic growth = less govt spending (pay for unemployment benefit)
- boom = low unemployment = less spending on benefits = tax receipts will increase
How does fiscal policy affect govt expenditure?
high tax = increased spending
Main influences on the net trade balance
- real income
- exchange rates
- state of the world economy
- degree of protectionism
- non price factors
How does real income affect the net trade balance?
higher income = more demand for M (ceteris paribus) = more imports = worse net trade balance
How does exchange rate affect the net trade balance?
- weak exchange rate = more exports (country can buy more/worth more)
- strong exchange rate = pound is worth more = cheap imports, expensive exports = worsen trade balance (but if competition is based on quality rather than price, then small changes in demand so trade balance won’t suffer)
How does the state of the world economy affect the net trade balance?
the economic performance of other economics affects the trade balance e.g slow growth in Eurozone in 2012 to 2014 affected the UKs export sales
How does protectionism affect the net trade balance?
high restrictions on free trade (e.g tariffs) = low imports which is good (ceteris paribus) but if other countries retaliate then it’s harder for you to export to them
Policies to reduce UK’s future current account deficit
- demand side policy = rise in direct taxation
- Bank of England try to achieve a competitive depreciation of sterling
