Government Spending
Government Purchases versus Transfer Payments
• The government spends trillions of dollars a year– GDP = C + I + GDP = C + I + G G + Xn+ Xn
• The GG 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.
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
0
5
10
15
20
25
1960 19651970 1975 1980
Year
1985 19901995
Total Government Purchases
State and Local Purchases
Federal Purchases
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Federal and State and Local Purchases Relative to GDP, 1960-2000
7-8
Total government purchases have been declining since the late 1960s and in 1995 constitute 16 percent of GDP
7-9
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
01960 19651970 1975 1980
Year
1985 19901995
Total GovernmentTransfer payments
State and Local Transfer Payments
Federal Transfer Payments
2
4
6
8
10
12
14
16
Federal and State and Local Transfer Payments as a Percentage of GDP, 1960-2000
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 have risen from just 6 percent of GDP in 1960 to more than 15 percent today
Graphing in “G”
C
C+I
C+I+G
G
Graphing the C + I + G + Xn Line
7-10
Disposable income ($)
45û
2,000 3,0001,000
1,000
2,000
C
3,000
C +I+G
C +I
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
To keep the graph as simple as possible, we are assuming the government spends a constant amount of money regardless of the level of disposable income
Graphing the C + I + G + Xn Line
7-11
Disposable income ($)
45û
2,000 3,0001,000
1,000
2,000
C
3,000
C +I+G
C +I
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
How much is G?
Answer: 400