Tuesday, 7 June 2011

Aggregate Demand - Government Spending (Macroeconomics)

Government spending, another component that makes up aggregate demand. It is often referred to as just (g). As with the other components of aggregate demand, there are a lot of factors which influence it, these factors will be discussed in this blog post.

So, the influencing factors are:

  • The type of government. This is key to how much government spending there is. If the government is a 'high tax, high spend' government, such as Labour in the UK then we can expect government spending to be generally quite high. If the government is the opposite and doesn't interfere with the market as much we can expect government spending to be lower.
  • Time of year/Time in power. Governments seem to spend a lot more in the run up to elections as an attempt to please the public and boost the chances of re-election. So, around these times government spending may be higher, and lower in times away from elections.
  • War or threat of war. The government will look to spend if the country is in war or is threatened by war. Defence spending will rise in an attempt to prepare. This is the same for crime as well. If the crime rate is high, or there is a threat that crime may rise then the government may increase spending to solve the issue. 
  • Current economic situation. Unemployment is probably the biggest factor here. If unemployment is high then the government need to attempt to create jobs. To create jobs, they increase spending which will boost aggregate demand and hopefully expand the economy - creating jobs. This theory will be explained in greater detail in a later post. If there is high inflation, the government may reduce spending to try and dampen down the rising price levels. 

Government spending is the least influenced of the components of aggregate demand, it generally stays fairly constant and doesn't vary that much. That is all. Next up is the influences on net exports... Stay tuned. 

1 comment:

  1. hey, then can I ask u some questions..? how influential government is to the Compulsory Consumption, Extending Property Rights and Personal Carbon Allowance?
    Thank you !