Aggregate Demand – Government spending (G) and net trade (X-M) Flashcards
What is government spending?
the day-to-day running costs of government e.g. wages to public sector workers, energy & rent bills for government offices, schools and hospitals etc..; also known as current spending by the government
It does not include transfer payments (e.g. government spending on welfare benefits or pensions – spending on these is not new income but a transfer of income from taxpayers to other groups)
What is central government?
government run at Westminster
What is local government?
local councils and county councils, city mayors
What is the role of government spending/what is it used for?
Changing government spending is a part of FISCAL policy
* Can be used to change the level of AD with fiscal multiplier)
* Can be used to provide public and merit goods
* Can be used to correct market failures, e.g. positive consumption externalities
* Can be used to influence economic regions., e.g. ‘levelling up’ Can be used to achieve greater equity in society by providing public services, including universal access to healthcare and education
What is budget deficit?
government spending exceeds tax revenue G>T; government borrows to fund its spending
What is budget surplus?
government spending is less than tax revenue ie G<T; government can pay back some of its debt.
What is balanced budget?
government spending equals tax revenue G=T.
What is fiscal multiplier?
estimates the final change in real national income (GDP) that results from an initial change in government spending plans.
Explain government spending in the trade cycle.
In an economic downturn/recession, government spending on welfare benefits and support for businesses increases – this is cyclical government spending; the opposite occurs in a growth phase. The government can also choose to make discretionary changes to its spending, unrelated to the economic cycle, e.g. in the Annual Budget.
What is net trade?
net export demand is the value of exports less the value of imports.
What is trade surplus?
net export demand is positive and adds to AD
What is trade deficit?
net export demand is negative and reduces AD.
What is trade balance equilibrium?
value of exports X equals the value of imports M, net export demand is neutral and AD does not change
What are factors influencing net trade?
- Real income
- Exchange rate
- State of global economy
- Degree of protectionism
- Non price competitiveness
- Price competitiveness
How does real income influence net trade?
if incomes are increasing at home, this can suck in imports reducing X-M; if incomes abroad are increasing, this may increase exports, increasing X-M.
