Question

In a detailed paragraph Give an account of how an increase in government spending can lead to an increase in the trade deficit

Answer 1

Revenue and capital expenditure may be defined as government spending. Revenue spending requires payment of government workers ' salaries, payment to ministers etc. Capital investment contributes to the creation of productive assets, such as road construction, bridges, schools etc. Now that we are aware of the government's revenue source and spending, let 's understand about the deficit. A budget deficit is a financial health measure in which the spending exceeds the revenue. It is the amount of the Revenue Account Deficit and Capital Account Deficit The government attempts to fill this difference by borrowing and issuing bonds or borrowing from the foreign government.

The increase in taxes is highly likely to offset the effect of increasing government spending that would leave Aggregate Demand (AD) unchanged. However, it is possible that higher spending and higher tax levels could lead to GDP growth. Consumers will cut spending in a recession leading to an rise in savings in the private sector. And a increase in taxes can not minimize spending as much as possible. The increased government expenditure can have a multiplier effect. If government spending allows the unemployed to gain employment, they will have more money to spend, resulting in an increased rise in aggregate demand.

In such economical spare capacity situations, government spending can trigger a greater final GDP increase than the initial injection. Government spending, even in a time of economic recession, can not act as an automatic blessing for growth in the economy. Government outlays intended to boost the economy will, in reality, fall short of that objective. So before authorizing any additional expenditures to boost growth , the government should have an understanding of how these expenditures are likely to stimulate growth and reveal how much uncertainty such projections surround. Additionally, this review should be available for consultation to the public before it is implemented in the framework.