Government Spending. Government Purchases versus Transfer Payments The government spends trillions of dollars a year –GDP = C + I + G + Xn GThe G in our.

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Presentation transcript:

Government Spending

Government Purchases versus Transfer Payments The government spends trillions of dollars a year –GDP = C + I + G + Xn GThe G in our formula refers to Government purchases It does NOT refer to transfer payments. 7-7

What is a transfer payment? Transfer payments is the government taking money from one group and giving it to another group in the economy.

Transfer Payments Include Social Security –Transferring between the generations Veteran Benefits –Transferring money to veterans Unemployment Benefits –Transferring from the employed to the Unemployed.

Government Purchases vs. Transfers –A–Approximately half is “transfer payments” The largest transfer payment is social security These payments eventually end up in the “C” part GDP (after they are spent) –A–Approximately half is “government purchases” The largest government purchase is defense These end up in the “G” part of GDP

Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved. Federal and State and Local Purchases Relative to GDP, Total government purchases have been declining since the late 1960s and in 1995 constitute 16 percent of GDP

7-9 Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved. Federal and State and Local Transfer Payments as a Percentage of GDP, Federal transfer payments have risen sharply since the mid-1960s, while state and local transfer payments have also grown substantially since the early 1970s. Total government transfer payments have risen from just 6 percent of GDP in 1960 to more than 15 percent today

Graphing in “G” C C+I C+I+G G

Graphing the C + I + G + Xn Line 7-10 Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved. To keep the graph as simple as possible, we are assuming the government spends a constant amount of money regardless of the level of disposable income

Graphing the C + I + G + Xn Line 7-11 Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved. How much is G? Answer: 400