Government Exppenditure Flashcards
What is government spending?
Government spending is expenditure by the government on public services
Give some examples of public services
Health
Education
Defence
What is capital spending?
Investment spending by the government
E.g. on motorways and defence schemes
What could be the effects of the economy expanding?
The government will likely spend less money:
- Fewer people may be out of work, less spending on unemployment benefits
- Working households may see pay increases, less needs to be spent on other forms of benefits
- Some people will choose to pay for private healthcare or private education, so there may be less spending needed on the NHS or schools
- Crime levels tend to be lower when the economy is growing, so less spending needed on the police
How would changes in political priorities affect government spending?
It may decide to increase or decrease its expenditure in response to changes in its priorities
Increased government spending means a shift to the right
Decreased government spending means a shift to the left
How would changes in economic priorities affect government spending?
The effects of such changes in government spending on aggregate demand are exactly the same as above
How would changes in national income abroad affect AD?
If country B’s national income increases, it will import more goods and services from country A, so country A’s exports will increase. Therefore the AD curve in country A shifts to the right
If on the other hand, country Bs national income falls, it will buy less from country A, and country A’s AD curve shifts to the left
What is an exchange rate?
An exchange rate is the price of one countries currency in terms of another countries currency
How would changes in exchange rates abroad affect AD?
Consider country A, and assume that the price of its currency increases
Country A now finds county B’s output cheaper, and so it increases its imports from country B. Thus, X-M falls and the AD curve shifts to the left as there is a large sucking in of imports
In the opposite situation, where the price of country A’s currency decreases, X-M increases, and country A’s AD curve shifts ti the right
How can you remember this when the pound is stronger?
Stronger pound
Imports cheaper
Exports dearer
Net trade decreases
AD decreases
How could you remember this when the pound is weaker?
Weaker pound
Imports dearer
Exports cheaper
Net trade increases
AD increases
What does level of trade protection refer to?
It refers to restrictions to international trade imposed by governments
How would changes in trade protection affect government spending?
Suppose country A trades freely with country B (with no trade restrictions). However, country B’s government decides to impose restrictions on imports from country A. Country A’s exports will fall, and its AD curve will shift to the left
On the other hand, in country B, lower imports mean that the value of X-M increases, and it’s AD curve shifts to the right
When GDP is rising why will there be more tax revenue?
- More revenue from income tax, as people’s income rises and more people are in work.
- Extra revenue from corporation tax, as business profits rise
- Higher revenue from VAT/sales tax, as people spend more on goods and services
- Increased revenue from capital gains taxes, as rising GDP causes people to buy more assets (such as houses and shares), pushing up their price and leading to a rise in the value of assets
