Government expenditure and gdp relationship

government expenditure and gdp relationship

that, over the period, there is a long run relationship between GDP and government expenditure in both countries. According to Granger. and total government spending, GDP and public order and safety spending and government spending, cyclicality, economic growth, correlation, cointegration. PDF download for A Time-Series Analysis of the Relationship Between Government Expenditure and Gdp, Article Information.

Government spending can be a useful economic policy tool for governments.

government expenditure and gdp relationship

Expansionary fiscal policy is an increase in government spending or a decrease in taxation, while contractionary fiscal policy is a decrease in government spending or an increase in taxes. Expansionary fiscal policy can be used by governments to stimulate the economy during a recession. For example, an increase in government spending directly increases demand for goods and services, which can help increase output and employment.

On the other hand, contractionary fiscal policy can be used by governments to cool down the economy during an economic boom.

How Does The Government Spending Affect The Economy?

A decrease in government spending can help keep inflation in check. Automatic stabilization is when existing policies automatically change government spending or taxes in response to economic changes, without the additional passage of laws. Discretionary stabilization is when a government takes actions to change government spending or taxes in direct response to changes in the economy.

For instance, a government may decide to increase government spending as a result of a recession. According to Keynesian economicsincreased government spending raises aggregate demand and increases consumptionwhich leads to increased production and faster recovery from recessions.

Government spending

Classical economistson the other hand, believe that increased government spending exacerbates an economic contraction by shifting resources from the private sector, which they consider productive, to the public sector, which they consider unproductive. The downward sloping demand curve D1 represents demand for private capital by firms and investorsand the upward sloping supply curve S1 represents savings by private individuals.

While intuitively appealing, these results raise some questions. An obvious concern is that a country with a larger GDP must also spend more on education.

Government spending - Wikipedia

This introduces the risk of reverse causality; that is, the model might pick the effect of GDP size on education expenditure and not vice-versa. The graph below somewhat addresses this limitation. World Development Indicators of the World Bank In the chart, GDP is measured by its rate of annual growth between and and education expenditure is measured as a share of total GDP over the period This time lag reduces the risk of reverse causality.

government expenditure and gdp relationship

The dots indicate combinations of education expenditure and GDP growth for each of countries for which data are available from the WDI. The red line provides the best statistical approximation of the bi-dimensional scatter plot.

government expenditure and gdp relationship

The positive slope indicates that countries that spent more on education as a proportion of GDP in experienced faster growth in the subsequent decade. More precisely, an increase in education expenditure by 1 point of GDP eg from 4.

Does government spending on education promote economic growth?

What do academics have to say about this? A lot of research has been devoted to the analysis of the effects of education on economic growth.

government expenditure and gdp relationship

Academic research in this area is characterised by a certain degree of technical complexity and results often differ across studies depending on the methodology used, the sample considered, or how education is measured. A survey of this vast literature identified 57 studies, many of which measure education in terms of outcomes eg enrolment rates, literacy rates, years of schooling in the workforce rather than expenditure. But the studies that did look at educational expenditure as a proxy for education generally reported a positive effect of education on growth.

A recent a meta-analysis considered 29 papers that specifically look at the impact of government education expenditures on economic growth.