CH26 Government expenditure and net trade Flashcards
Why do governments spend money?
-to provide goods and services for their citizens
-to adjust demand over the trade cycle
-to achieve other objectives as part of their fiscal policy
What are the main influences on the net trade balance?
-prices of goods
-real income in the domestic economy
-exchange rates
-the state of the world economy
-the degree of protectionism
-non-price factors
Is the size of government spending the same for every country?
no, the size of gov spending varies from country to country
In a modern economy what will the gov fund?
in a modern economy, the gov will fun defence, the police and judiciary, roads and education. There are then wide divergencies between economies. In a private sector economy, like the United States, the private sector is expected to provide such goods such as health care, housing and social care. In a mixed economy, the state will provide many of these goods
What is an example of a country with a mixed economy?
Sweden
Is government spending fixed?
yes, much of government spending is fixed from year to year
What are government announcements about changes in spending made in?
made in budgets
What is meant by fiscal policy of the government?
it is decisions about government spending, together with taxes and borrowing money
Typically, what do changes in government spending reflect?
reflect changing priorities about how to spend money
How can deliberate changes in gov spending affect total spending in the economy?
-higher gov spending can boost total spending and so affect variables such as unemployment and inflation.
-in particular, during the recession phase of a trade cycle, when unemployment is rising, governments may choose to increase their spending. This should reduce unemployment, since more jobs will be created, and boost demand in the economy.
-if the economy is in boom, the gov may choose to reduce gov spending. This should reduce demand in the economy and so reduce inflation
What will also happen to government spending during a recession and why?
during a recession, government spending will automatically rise. This is because during a recession, unemployment rises and some workers earn less. These will then be a rise in gov spending on unemployment benefits and benefits to support those on low or no incomes.
What does the impact of changes in gov spending on total spending in the economy depend on? and explain
depends on the levels of taxation.
-if the government raises taxes by the same amount as a rise in its spending, then there might be little impact on total spending in the economy.
-on the other hand, a rise in total spending by the government with no change in taxation will have more impact.
What is a budget deficit?
when government spending is greater than government receipts such as taxation
What is a budget surplus?
when government spending is less than government receipts such as taxation
What will happen to the the budget if there is a rise in government spending with no change in taxation?
it will either reduce a budget surplus or increase s budget deficit
What are exports?
exports are goods and services sold to foreigners
What are imprts?
imports are goods and services bought from foreigners
What is net exports / the net trade balance?
it is exports minus imports
What are the 6 factors that influence the demand for exports and imports?
-price
-real income in the domestic economy
-exchange rates
-the state of the world economy
-degree of protectionism
-non-price factors
How does price affect demand for imports and exports?
-the higher the price, the lower the quantity demanded
How does real income in the domestic economy affect demand for exports and imports?
-if the economy is doing well and real incomes of households are rising, then they spend more. Part of this spending will be on imported goods and services.
-so rising real incomes suck in more imports.
-conversely, if the economy is doing badly and is in recession, real incomes will fall as so too will imports
How does the exchange rate affect demand for imports and exports?
-a rise in the value of the pound means that it costs foreigners more to buy pounds with their local currency. This makes exports from the UK less price competitive and hence UK exports are likely to fall.
-equally, a rise in the value of the pound means that UK buyers can buy foreign currency more cheaply with pounds. So imports become more price competitive to UK buyers.
-a fall in the value of the pound leads to the opposite result. UK exports become more price competitive to foreign buyers. In contrast, UK buyers find that imports become less price competitive.
How does the state of the world economy affect demand for imports and exports?
-if the UK’s main trading partners are doing well economically, then UK exports are likely to rise.
What is the largest export market for the UK?
It is the rest of the European Union
