Macro - Eco please help me. Many thanks!!!

In fiscal balance (G-T):

Why “government spending (G) is INSENSITIVE to current economic activity” => Not impacted by GDP (Y)???

Anyone here could explain it?

Thanks alot.

Is there some reason that a change in real aggregate income should cause a change in government spending?

looking at countries worldwide, there might be a correlation between GDP and government spending

Seems intuitive to me that government spending would increase as real income decreases

I’m not sure what your question is, but if I understood correctly, then it’s because government spending follows fiscal policy and is independent of GDP levels and growth, although there tends to be a correlateion obviously.

tomtom2312: Think of government spending as independent of GDP (the word is “exogenous”), not necessarily as a constant. The government will do whatever it wants. If there is a recession, they can spend more to help unemployed citizens, or they can choose austere policies. Either way, there is no equation to link it to the other factors of GDP.

In the short term, overspending = borrowing; underspending = saving.

In the long term, I think there must be more of a link with government income, but its not easy to write this as an equation.

[Statistical] independence means that ρ = 0. So which is it: are they (statistically) independent, or does ρ ≠ 0?


If real income increases, does government spending therefore decrease?

Again, why?

Government spending (G) is exogenous variable in GDP equation. That means G has impact in GDP but GDP hasn’t any impact on G.

To understand why –

G is the government spending except any type of transfer payments (e.g. benefits)

Government spending is a fiscal policy which comes through a long process of political decision making and approval of congress (in USA). It includes constructing dam, fixing road, defense and security etc. If the GDP goes low in an economy, it does mean the lower income level but it doesn’t have anything to do with increasing the spending of govt to fix road, or new construction project.

Also emphasize on the word ‘current’. GDP is a periodic data. Even if the government decides to spend more to revive the economy because of low GDP growth, it can’t fix the current GDP anyway because of the decision lag.

So, if G increases the GDP will increase.

But if GDP increase, it will have no impact on the GDP of that period (current GDP).

Hope it makes sense.