Question

What is the difference between federal purchases and federal expenditures? Are federal purchases higher today as a percentage of GDP than they were in 1960? Are federal expenditures as a percentage of GDP higher?

Answer 1

Below are the differences between federal purchases and federal expenditures

• Government purchase is narrower in definition than government expenditure.
• Government expenditure programs may include government purchases of raw materials for that program, but not vice versa.
• A government purchase happens when the government makes a defense purchase from the private defense production industry, like buying 100 fighter aircrafts.
• Now say we have a government program to build a major highway system across the USA.
• Government expenditure includes employment and wages of the thousands of people working on this project, and also the purchasing of billions of dollars worth of cement, concrete, steel, electrical goods, cables etc. to build the highways system.
• Thus government expenditure includes government purchases as an integral part.
• Government expenditure also includes
• 1) Paying for interest on the national debt (to the people and companies and institutions holding the bonds)
• 2) Transfer payments (as social security payments, unemployment compensation, Medicare, food stamps and assistance to needy families etc.)
• Government expenditure also includes expenses of running the various government agencies like the EPA, FBI, INS etc.

The government-purchases component of aggregate demand includes all purchases by government agencies of goods and services produced by firms, as well as direct production by government agencies themselves. When the federal government buys staples and staplers, the transaction is part of government purchases. The production of educational and research services by public colleges and universities is also counted in the government-purchases component of GDP.

While government spending has grown over time, government purchases as a share of GDP declined from over 20% until the early 1990s to under 18% in 2001. Since then, though, the percentage of government purchases in GDP began to increase back toward 20% and then beyond. This first occurred as military spending picked up, and then, more recently, it rose even further during the 2007–2009 recession.

In 1960, the federal government accounted for the majority share of total purchases. Since then, however, federal purchases have fallen by almost half relative to GDP, while state and local purchases relative to GDP have risen.

A number of changes have influenced transfer payments over the past several decades. First, they increased rapidly during the late 1960s and early 1970s. This was the period in which federal programs such as Medicare (health insurance for the elderly) and Medicaid (health insurance for the poor) were created and other programs were expanded.

General government spending, as a share of GDP and per person, provides an indication of the size of the government across countries. General government spending generally consists of central, state and local governments, and social security funds. The large variation in this indicator highlights the variety of countries' approaches to delivering public goods and services and providing social protection, not necessarily differences in resources spent. This indicator is measured in terms of thousand USD per capita and as a percentage of GDP.