In: Economics
Is it possible that PE > GDP in a given year in a closed economy if some aggregate expenditure falls on output produced in the previous year? Please explain in detail with different possibilities.
It is possible in a closed economy that the public expenditure is more than the Gross Domestic Product in the economy. In a closed economy the Gross Domestic Product(GDP) = C+I+G
where C= Consumption expenditure
I= Investment
G=Government expenditure.
In the closed economy there is no trade to the outside economy.
In the closed economy the investment I= Private Savings + Public Savings.
Here, the public expenditure can be increased through the public borrowing. The main sources for public borrowing in the closed economy is explained below:
So in the closed economy the government can able to increase the public expenditure more than GDP by increasing its savings, reduce the tax rates, issue government securities to the public(within the economy), borrowing from the central bank of the economy, borrowings from individuals etc.
So the increase in public expenditure more than the GDP in a closed economy is possible.