Download Government Spending Government Purchases versus Transfer

Government Spending
Government Purchases versus
Transfer Payments
• The government spends trillions of
dollars a year
– GDP = C + I + G + Xn
• The G in our formula refers to
Government purchases
• It does NOT refer to transfer
payments.
7-7
What is a transfer payment?
Transfer payments
is the government
taking money from
one group and
giving it to another
group in the
economy.
1
Transfer Payments Include
• Social Security
– Transferring between the generations
• Veteran Benefits
– Transferring money to veterans
• Unemployment Benefits
– Transferring from the employed to the
Unemployed.
Government Purchases vs.
Transfers
– Approximately half is “transfer payments”
• The largest transfer payment is social security
• These payments eventually end up in the “C”
part GDP (after they are spent)
– Approximately half is “government
purchases”
• The largest government purchase is defense
• These end up in the “G” part of GDP
Federal and State and Local Purchases
Relative to GDP, 1960-2000
25
Total Government Purchases
Total government
purchases have been
declining since the late
1960s and in 1995
constitute 16 percent of
GDP
20
15
State and Local Purchases
10
5
Federal Purchases
0
1960
1965
1970
1975
1980
1985
1990
1995
Year
Copyright ©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
7-8
2
Federal and State and Local Transfer
Payments as a Percentage of GDP, 1960-2000
16
Federal transfer payments
have risen sharply since the
mid-1960s, while state and
local transfer payments have
also grown substantially since
the early 1970s.
Total Government
Transfer payments
14
State and Local
Transfer Payments
12
10
8
6
Total government transfer
payments have risen from just
6 percent of GDP in 1960 to
more than 15 percent today
4
Federal Transfer Payments
2
0
1960
1965
1970
1975
1980
1985
1990
1995
Year
7-9
Copyright ©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Graphing in “G”
C+I+G
C+I
G
C
Graphing the C + I + G + Xn Line
To keep the graph as
simple as possible, we are
assuming the government
spends a constant amount
of money regardless of the
level of disposable income
3,000
C+I+G
C+I
2,000
C
1,000
45 û
1,000
2,000
Disposable income ($)
Copyright ©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
3,000
7-10
3
Graphing the C + I + G + Xn
Line
How much is G?
3,000
C+I+G
C+I
2,000
C
Answer: 400
1,000
45 û
1,000
2,000
Disposable income ($)
Copyright ©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
3,000
7-11
4