The Role Of Government In An Economy – What do we want from our government? One answer is that we want more than we did a few decades ago. The role of government has grown dramatically over the past 80+ years. In 1929 (the year the Commerce Department began keeping annual data on United States macroeconomic indicators), government spending at all levels (state, local, and federal) was less than 10% of the nation’s total output, known as gross domestic product. product (GDP). This share has more than tripled in the current century.

Figure 15.1 “Government Expenditures and Revenues as a Percentage of GDP” shows total government expenditures and revenues as a percentage of GDP from 1929 to 2010. All levels of government are covered. Government Expenditure All expenditure by government bodies. includes all costs of government agencies. Government revenues All funds received by government agencies. includes all funds received by government agencies. The main component of government revenues is taxes; Income also includes fees, fines and various receipts from other sources. We will look at the types of government revenues and expenditures later in this chapter.

The Role Of Government In An Economy

Government spending and revenue have risen sharply since 1929 relative to GDP, the most widely used measure of economic activity.

Government Intervention In The Economy

Figure 15.1 “Government Expenditures and Revenues as a Percentage of GDP” also shows government purchases as a percentage of GDP. Government procurement Goods or services purchased by a government agency. occurs when a government agency buys or produces a good or service. We measure government procurement and provide government opportunity cost. Whether a government agency buys or produces a good or service, factors of production are applied to the public sector rather than to private sector activity. The purchase of new vehicles by the City Interior Department is an example of public procurement. Spending on public education is another example.

Government spending and procurement are not the same because most government spending is not on the purchase of goods and services. The main source of this gap is transfer payments, which are payments made by government agencies to individuals in the form of grants rather than for labor or other services. , payments made by government agencies to individuals in the form of grants, not for labor or other services. Transfer payments represent government expenditures, not government purchases. Governments engage in transfer payments to redistribute income from one group to another. An example of transfer payments is various welfare programs for people with low incomes. Social Security is the largest transfer payment program in the United States. This program transfers the income of working people (by taxing their wages) to people who retire. Interest payments on government debt, which is a type of expenditure, is another example of expenditure that does not count as government purchases.

15.1 A few points on “Government Expenditures and Revenues as a Percentage of GDP” are given special attention. First, consider the path of public procurement. Government purchases as a percentage of GDP rose sharply during World War II, then almost immediately fell back to prewar levels. During the Korean War, government purchases increased again, but not as dramatically. But this time they didn’t retreat so much after the war. It was during this period that military spending increased to respond to the Cold War challenge posed by the former Soviet Union and other communist states. Since then, public procurement has accounted for 17 and 23% of GDP. The Vietnam War, the Persian Gulf War, and the wars in Afghanistan and Iraq did not affect the acquisitions that characterized World War II or even the Korean War. A second development, the widening gap between expenditures and purchases, has emerged since the 1960s. This reflects an increase in federal transfer programs, mainly Social Security, programs to help people pay for health care costs, and aid to low-income people. We will discuss these programs later in this chapter.

Finally, note the relationship between expenses and income. A government has a balanced budget when its revenues equal its expenditures for a period of time, which occurs when the government’s revenues equal its expenditures for a period of time. . A budget surplus is a situation that occurs when the state’s revenues exceed its expenditures. If the government’s revenues exceed its expenditures, a budget deficit occurs when government expenditures exceed revenues. government expenditures may exceed revenues.

Free Market Economy

Until 1980, revenues roughly matched total public sector expenditures, except during World War II. However, expenditures remained consistently higher than revenues from 1980 to 1996. During this period, the federal government ran very large deficits, deficits that exceeded the surpluses generated at the state and local government levels. The largest increases in spending came from Social Security and increased health care spending at the federal level. The federal government’s efforts to reduce and eventually eliminate the deficit, along with state and local government surpluses, resulted in public sector budget surpluses beginning in 1997. By 1999, the Congressional Budget Office was projecting an increase in federal revenues. budget surpluses produced by a growing economy will continue into the 21st century.

After September 11, 2001, such a rosy assumption was rejected. Terrorist attacks on the United States and later on several other countries led to a sharp and sustained increase in federal spending on the wars in Afghanistan and Iraq, as well as in spending on Homeland Security. The George W. Bush administration proposed a tax cut that Congress approved. The increase in expenditure on the above-mentioned items and others, as well as the reduction of taxes, created a significant deficit. The deficit has grown significantly since the recession that began in December 2007. Tax receipts also fell as incomes fell. The spending increased due to increased spending related to the American Recovery and Reinvestment Act of 2009, designed to stimulate the economy. It included extending unemployment benefits, increasing aid to the poor, and increasing infrastructure spending.

The evidence presented in Figure 15.1 “Government Expenditures and Revenues to GDP” does not fully reflect the growth in demand for public sector services. In addition to governments that spend more, people in the United States clearly prefer governments that do more. The amount of regulatory work carried out by governments at all levels, for example, has grown dramatically over the past few decades. Regulations designed to prevent discrimination, protect consumers, and protect the environment are part of the response to growing demand for public services, as are federal programs for health and education.

Figure 15.2 “Government Revenue Sources and Expenditures: 2009” summarizes the main sources of revenue and types of expenditures for the US federal government and the European Union. In the United States, most revenues come from personal income taxes and payroll taxes. Most of the costs were related to transfer payments to individuals. Federal purchases were mainly for national defense; The “other purchases” category includes things like spending on transportation projects and the space program. Interest payments on the national debt and grants from the federal government to states and local governments were other major expenditures. The situation in the European Union differs primarily in that a larger share of revenue comes from taxes on production and imports, while much less is spent on defense.

Solved Which Of The Following Statements Best Describes A

The four panels show the sources of government revenue at all levels in the United States and the European Union in 2009 and the share of spending on various activities.

To understand the role of government, it is useful to distinguish between four broad types of government involvement in the economy. First, the government tries to respond to market failures to allocate resources more efficiently. Efficiency in a certain market means that the volume produced is determined by the intersection of the demand curve, which reflects all the benefits of consuming a particular product or service, and the supply curve, which reflects the opportunity costs of its production. Second, government agencies act to encourage or discourage consumption of certain goods and services. Prohibiting the use of drugs such as heroin and cocaine is an example of government efforts to stop the use of these drugs. Third, the government distributes income through programs such as welfare and social security. Fourth, the government can use its spending and tax policies to influence the level of economic activity and the price level.

In this section, we examine the first three aspects of government involvement in the economy. Fourth, efforts to influence the level of economic activity and the price level fall within the province of macroeconomics.

In the previous chapter on markets and efficiency, we learned that a market maximizes net profit by achieving a level of output at which marginal profit equals marginal cost. This is an effective solution. In most cases, we expect markets to converge to achieve this outcome—an important lesson of Adam Smith’s idea of ​​the market as the invisible hand that guides the economy to the best use of its scarce factors of production.

The Role Of Government

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