SummaryIn this Learning Path, we learn the basic concepts needed to start studying any country’s economy. Even though the analysis should start by assuming either a closed or open economy, this LP omits such concepts, and gives just the very basic notions required to study macroeconomics.
Measuring the production of an economy:
- Government spending
- Net exports
Government spending, or government expenditure, is one of the components of a country’s gross domestic product. It includes all the spending on goods and services made by the government at all levels: local, regional, federal, national, etc. This component corresponds to the sum of government consumption and government gross investment.
Government consumption corresponds to the amount the government spends, subtracting the government’s revenue. On the one hand, government spending includes transfer payments made to households, such as unemployment benefits. On the other hand, government revenue includes taxes, which account for most of it.
As for investment, government spending has a multiplier effect. The reason is that government spending includes government investment. The multiplier effect makes that any amount spent in the present generates more than that amount in the future.
The level of government spending is one of the tools used in fiscal policy. An increase of public spending can be used to boost the economy, because the GDP increases as public spending does. On the other hand, a reduction of the public spending slows down the pace of GDP growing. The weight of government spending as a percentage of the GDP is considered as a measure of the importance of the public sector in a country.