Question

Assignment Topic:

Select a country of your choice and explain the impact of expenditure multiplier on national income for the last ten years.

Answer 1

The important fiscal policy levers in the hands of the Indian government are the budgetary spending on the capital account and revenue account, and the various tax rates. It would be worthwhile to see how changes in each of these policy levers impact the final output in the economy. When there are inflationary pressures due to demand pull or when the overall growth in the economy is faltering, estimates of fiscal multipliers would help make a conscious decision on fiscal policy and help choose from among the various fiscal policy instruments. Or in situations like the present one, where the economic growth is pallid at 6.2% in 2011-12 and at 5% for 2012-13 but any fiscal strategy has also to bear in mind the high levels of fiscal deficit, estimates of multipliers become crucial.

Expenditure on the capital account by the government plays a crucial role in capital formation in the economy. An increase in capital expenditure by the government translates to a much higher public investment in the economy. Moreover, public investment crowds in private investment resulting in even greater expenditure on the demand side and addition to capital stock on the supply side.  

Expenditure on the revenue account includes direct spending by the government on goods, services and wage payments, as well as transfers payments to the rest of the economy. Transfer payments involves transfers of purchasing power from the government to the rest of the economy and includes major subsidies, pensions and other retirement benefits, relief on account of natural calamities etc.