Public Expenditure

Question 1

Capital expenditure

Answer 1

• government spending on long term investments and assets
• e.g. roads, bridges, public buildings, and investments in education
• contributes to economic growth and productivity by enhancing capital

Question 2

Current expenditure

Answer 2

• spending on recurring items
• does not contribute to economic growth

Question 3

Transfer payments

Answer 3

• payments made to goods and individuals or groups without any expectation of anything in return
• e.g. welfare payments, subsides

Question 4

Components of the current account

Answer 4

• exports - imports
• net primary income (income earned abroad e.g. remittances
• net current transfers (secondary income)

Question 5

The financial account

Answer 5

• Measures the flow of investment funds from UK firms buying foreign firms or investing abroad
• net direct investment + net portfolio investment + reserve assets

Question 6

Capital account

Answer 6

• net capital transfers + net transactions in non-produced non-financial assets

Question 7

Balance of payments

Answer 7

• Current Account + Financial Account + Capital Account = 0

Question 8

BOP Trade surplus (on current account) chain

Answer 8

• current account surplus is good and a sign of economic strength as there is a strong demand for the country’s exports which creates jobs, wealth & economic growth
• that is why a healthy trade position is one of the four main macro economic objectives
• Country can now build up savings in the form of foreign assets (FDI), gold or foreign currency reserves
• However, can effect domestic producers. Are susceptible to demand fluctuations of exports if too reliant

Question 9

BOP Trade deficit (on current account) chain

Answer 9

• assumed as a bad thing, as indicates a lack of competitiveness/ efficiency
• a country’s expenditure must be larger than income s must be financed by borrowing
• if it borrows too much may default.
• However, a bit of borrowing is good

Question 10

National debt

Answer 10

• total amount of money that a country owes it creditors. Adds up all of the governments outstanding debt, including bonds, notes and bills
• may have to default on debt as have to pay interest on their loans
• can affect a countries credit rating. A high rating makes it harder for a country to borrow money in the future

Question 11

Crowding out

Answer 11

An economic theory that argues that rising public sector spending drives down or even eliminates private sector spending. This is because:
1. if the government wants to finance its spending it can increase borrowing or taxation
2. Increased taxation leads to a decrease of consumption
3. To borrow money they issue government bonds which increases the demand for money in financial markets
4. This increases demand which increases interest rates
5. Higher interest rates make borrowing more expensive
6. Therefore there is less investment from businesses

Question 12

Effects of an increase in public expenditure

Answer 12

• Productivity and growth: education & healthcare -> enhance human capital and physical capital -> contributing to productivity long term -> living standards increase
• Equality: Can reduce income inequality by providing social support to disadvantaged groups and funding education
• Increase of AD: AD= I+G+C+ (X-M) -> multiplier effect
• Increased innovation

EVAL:
- Crowding out may not increase AD
- depends of what spending is on and how much is being spent