Macroeconomics Chapter 121 Government Expenditure C h a p t e r 1 2

Macroeconomics Chapter 122 Data on Government Expenditure  Government expenditure is the dollar amount spent at all levels of government for purchases of goods and services transfer payments (amounts given to households and businesses) interest payments

Macroeconomics Chapter 123 Data on Government Expenditure

Macroeconomics Chapter 124 Data on Government Expenditure

Macroeconomics Chapter 125 Data on Government Expenditure

Macroeconomics Chapter 126

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8 Data on Chinese Government Expenditure 中国 （ 2007 ） 美国（课本上 的数据） 占 GDP 比重占财政比重占 GDP 比重占财政比重 财政开支 国防 教育 社保

Macroeconomics Chapter 129 The Government’s Budget Constraint  Government budget constraint: total uses of funds = total sources of funds G t + V t = T t + ( M t − M t−1 )/ P t real purchases+ real transfers = real taxes+ real revenue from money creation

Macroeconomics Chapter 1210 The Government’s Budget Constraint  G t represent government purchases in real terms for year t. C t + I t + G t, is the aggregate real spending on goods and services in year t.  V t represent the government ’ s real expenditure on transfers.  The real value of this revenue for year t is (M t −M t−1 )/P t  T t be the total real taxes collected by the government in year t.

Macroeconomics Chapter 1211 The Government’s Budget Constraint  Government budget constraint G t + V t = T t real purchases+ real transfers= real taxes

Macroeconomics Chapter 1212 Public Production TThe government subcontracts all of its production to the private sector. Public investment, publicly owned capital, and government employment are zero.  Public services have zero effect on utility and production.

Macroeconomics Chapter 1213 The Household’s Budget Constraint  Household budget constraint C t + (1/P) · ∆B t +∆K t = (W/P) t · L s t + r t−1 · ( B t−1 /P + K t−1 )  With Government C t + (1/P) · ∆B t +∆K t = (W/P) t · L s t + r t−1 · ( B t−1 /P + K t−1 ) +V t − T t

Macroeconomics Chapter 1214 The Household’s Budget Constraint  Multiyear household budget constraint with transfers and taxes:  C 1 + C 2 /(1+r 1 ) + · · · = (1+r 0 ) · ( B 0 /P+K 0 ) +(w/P) 1 · L s 1 +(w/P) 2 · L s 2 /(1+r 1 ) + ·· · +( V 1 − T 1 ) + ( V 2 − T 2 )/( 1 + r 1 ) +( V 3 − T 3 )/[(1+ r 1 ) · ( 1 + r 2 ) ] + ·· ·

Macroeconomics Chapter 1215 Permanent Changes in Government Purchases  Theory G+ V = T or V − T = −G G rises by one unit each year, V − T falls by one unit each year. household ’ s disposable real income falls by one unit each year.

Macroeconomics Chapter 1216 Permanent Changes in Government Purchases  Theory Since the typical household has one less unit of real disposable income each year, we predict that the decrease in C each year will be roughly by one unit.

Macroeconomics Chapter 1217 Permanent Changes in Government Purchases  An increase in G does not shift the curves for the demand or supply of capital services. the market-clearing real rental price, (R/P) ∗, and quantity of capital services, (κK) ∗, do not change.

Macroeconomics Chapter 1218 Permanent Changes in Government Purchases  κK is unchanged, and  A and L are fixed.  Therefore, Y is unchanged. Important conclusion that a permanent increase in government purchases does not affect real GDP.

Macroeconomics Chapter 1219 Permanent Changes in Government Purchases r = ( R/ P) · κ − δ(κ) a permanent increase in government purchases does not affect the real interest rate.

Macroeconomics Chapter 1220 Permanent Changes in Government Purchases  G does not shift labor supply, L s, which is fixed at L, and does not shift the labor-demand curve, L d. the market-clearing real wage rate, (w/P) ∗, does not change. We conclude that a permanent increase in government purchases does not affect the real wage rate.

Macroeconomics Chapter 1221 Permanent Changes in Government Purchases  Since r does not change => no intertemporal-substitution effect.  Intratemporal substitution effect involves consumption and leisure ： labor and, hence, leisure is fixed. In any event, this substitution effect depends on the real wage rate, w/P, which does not change

Macroeconomics Chapter 1222 Permanent Changes in Government Purchases  Theory our prediction is that a permanent increase in government purchases by one unit causes consumption to decrease by about one unit.

Macroeconomics Chapter 1223 Permanent Changes in Government Purchases  Theory Y= C+ I + G the changes in C and G fully offset each other and, thereby, allow I to remain unchanged.

Macroeconomics Chapter 1224 Permanent Changes in Government Purchases  We predict that a permanent increase in G, Reduces consumption, C, roughly one to one. The variables that do not change include real GDP, Y; gross investment, I; the quantity of capital services, κK; the real rental price, R/P; the real interest rate, r; and the real wage rate, w/P.

Macroeconomics Chapter 1225 Permanent Changes in Government Purchases  Useful government expenditure G C t + (1/P) · ∆B t +∆K t = (W/P) t · L s t + r t−1 · (B t−1 /P + K t−1 )+V t − T t C t +λG+ (1/P) · ∆B t +∆K t = (W/P) t · L s t + r t−1 · (B t−1 /P + K t−1 )+V t − T t + λG

Macroeconomics Chapter 1226 Permanent Changes in Government Purchases  ∆G=1  ∆(V t − T t + λG)=-1+λ  ∆(C t + λG)=-1+λ  ∆C t + λ∆G=-1+λ  ∆C t =-1

Macroeconomics Chapter 1227 Permanent Changes in Government Purchases

Macroeconomics Chapter 1228 Temporary Changes in Government Purchases  Theory Assume now that year 1 ’ s real government purchases, G1, rise by one unit, while those for other years, G t, do not change. That is, everyone expects that G t in future years will return to the original level.

Macroeconomics Chapter 1229 Temporary Changes in Government Purchases  Theory V t − T t = −G t V t − T t falls by one unit, and households have one unit less of real disposable income. In subsequent years, V t − T t and, hence, real disposable income return to their original levels.

Macroeconomics Chapter 1230 Temporary Changes in Government Purchases  Households would spread their reduced disposable income in year 1 over reduced consumption, C t, in all years t.  Therefore, the effect on year 1 ’ s consumption, C 1, will be relatively small.  The propensity to consume out of a temporary change in income is greater than zero but much less than one.

Macroeconomics Chapter 1231 Temporary Changes in Government Purchases  Theory Y= C+ I + G Gross investment, I, must fall. The real interest rate will rise in the long run.

Macroeconomics Chapter 1232 Temporary Changes in Government Purchases  Theory When the change in G was temporary, year 1 ’ s extra G comes mainly at the expense of I, rather than C. When the change in G was permanent, we predicted that most or all of the extra G came at the expense of C.

Macroeconomics Chapter 1233 Government Purchases and Real GDP During Wartime: Empirical  We test the model by studying the response of the economy to the temporary changes in government purchases that have accompanied U.S. wars.

Macroeconomics Chapter 1234 Government Purchases and Real GDP During Wartime: Empirical

Macroeconomics Chapter 1235 Government Purchases and Real GDP During Wartime: Empirical  The data also show that the rises in real GDP are by less than the increases in government purchases.  Aside from military purchases, the totals of the other components of real GDP are down during wartime. The model accords with this pattern.  However, the components of real GDP other than military purchases do not fall nearly as much as predicted by the model.

Macroeconomics Chapter 1236 Wartime Effects on the Economy  Employment during wartime The basic pattern is that the military took in a significant number of persons total employment expanded a little more.

Macroeconomics Chapter 1237 Wartime Effects on the Economy  Effects of war on labor supply At this point, there is no settled view among economists about the best way to understand labor supply during wartime.  A large expansion of real government purchases, G, means that households have less real disposable income.  Casey Mulligan (1998) argues that labor supply, Ls, increases during wartime because of patriotism.  the military draft would affect the labor supply of single woman.

Macroeconomics Chapter 1238 Wartime Effects on the Economy

Macroeconomics Chapter 1239 Wartime Effects on the Economy  Employment Effects on Labor Markets Prediction that a war reduces the real wage rate, w/P

Macroeconomics Chapter 1240 Wartime Effects on the Economy  Effects of war on the rental market a wartime increase in labor supply, Ls, led to an increase in labor input, L. the rise in L tends to increase the MPK (for a given κK).  The demand curve shifts right

Macroeconomics Chapter 1241 Wartime Effects on the Economy

Macroeconomics Chapter 1242 Wartime Effects on the Economy  Effects of war on the rental market For a given K, the rise in κK corresponds to an increase in the capital utilization rate, κ. r = ( R/ P) · κ − δ(κ)  increases in R/P and κ imply that r increases.

Macroeconomics Chapter 1243 Wartime Effects on the Economy  Effects of war on the rental market The predictions for higher real interest rates during wartime conflict with the U.S. data.