government spending

• One way in which governments intervene is by spending money on a variety of goods and services, such as defence, the judiciary, education and healthcare.
• The size of government spending varies from country to country. In a free market economy, such as the United States, the private sector is expected to provide goods such as healthcare and housing, while the state will provide many of these goods in mixed economies such as Sweden. Some mixed economies have much higher state involvement than others.
• When the government increases its spending on goods and services, it injects money into the economy and thus increases aggregate demand. Government spending can have a multiplier effect, meaning a change in government spending can lead to a larger final change in GDP.
• During a recession, the government can help stimulate economic activity, by increasing its own spending (for example on infrastructure), preventing a more severe downturn. This is known as fiscal stimulus.
• The impact of changes in government spending on total spending in an economy depends on levels of taxation: if the government raises taxes by the same amount as a rise in spending, there might be little impact on total spending, but a rise in government spending without a change in taxation would have more impact.
• When government spending is greater than government receipts, such as taxation, there is a budget deficit. When government spending is less that government receipts, there will be a budget surplus.
• Exports are goods and services sold to foreigners, while imports are goods and services bought from foreigners. Net exports, or the net trade balance, is the total of exports minus imports (X - M).
• The demand for exports and imports is influenced by:

  • price
  • income in the domestic economy
  • the exchange rate
  • the world economy
  • level of tariffs/barriers
  • non-price factors, such as the quality of goods
• Buyers make decisions partly based on the price of a good - the higher the price, the lower demand is. One factor that affects price is the cost of production
• Over the last 15 years, the production of manufactured gods has moved from high-wage economies like the UK to low-wage economies like China. This makes China's prices relatively low compared to the UK's and therefore increases imports from china into the UK.
• If real incomes are rising, households will spend more. Part of this spending will be on imported goods and services. On the other hand, an economy that is doing badly or is in recession will see fewer imports as households spend less.
• A rise in the value of the pound means that it costs foreigners more to buy pounds using foreign currency, making UK exports less price competitive and likely causing UK exports to fall. The rise in value of the pound would also make it cheaper for UK buyers to purchase foreign goods, increasing imports. A fall in the value of the pound has the opposite result, increasing exports and decreasing imports.
• SPICED: Strong Pound, Imports Cheap, Exports Dear
• If the UK's main trading partners are doing well economically, then UK exports are likely to rise as export markets (such as the EU) purchase more UK goods when there is fast economic growth and fewer when there is a recession.
• Almost all countries limit the goods and services entering their economies in various ways. They may put quotas (physical limits to how much can be imported) on goods, for example. They may also put tariffs on imports - tariffs are taxes on imports. The greater the international degree of protectionism, the more difficult it is for UK firms to export.