Question

1.What role does Government spending play in GDP? What happens when it spends less?

2.The US decided to spend it's way out of the recession and England decided to cut spending. Compare and contrast the two ways to deal with the recession: austerity or spending, reducing interest rates and QE. Has there been a difference in GDP growth?

3. Is GDP really a good way to measure how well we are doing as a country? Yes or no and Why?

Answer 1

Answer to the first question is provided below :

1) The National Income accounting identity is given as : Y = C + I + G + NX . Here , G = government spending .

So government spending is a part of GDP , total government spending forms a major part of aggregate demand in the economy . The goods and services manufactured by government sector is a part of GDP . Dwindling government spending in military , investments in public sector etc can cause economic growth to slacken . Government spending increases aggregate demand which boosts production and level of GDP in the economy .

When government spends less , aggregate demand for goods and services fall in the economy which causes recessionary gap , and actual GDP falls below potential . Also spending less in social goods such as health care , education etc can also reduce human capital stock in the economy . Cut down of government spending causes money supply to decrease in the economy .