June 22, 2024 

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ACTUAL INVESTMENT: Investment expenditures that the business sector actual undertakes during a given time period, including both planned investment and any unplanned inventory changes. This is a critical component of Keynesian economics and the analysis of macroeconomic equilibrium, which occurs when actual investment is equal to planned investment. The difference between planned and actual investment is unplanned investment, which is inventory changes caused by a difference between aggregate expenditures and aggregate output. Should actual and planned investment differ, then aggregate expenditures are not equal to aggregate output, and the macroeconomy is not in equilibrium.

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Spending by the government sector including both the purchase of final goods and services, or gross domestic product, and transfer payments. Government expenditures are used by the government sector to undertake key functions, such as national defense and education. These expenditures are financed with a combination of taxes and borrowing.
Government expenditures are used either to purchase a portion of gross domestic product (government purchases) or as gifts to members of the other sectors (transfer payments). Both types of expenditures have an impact on the macroeconomy. They can trigger business-cycle instability or be used to address the unemployment and inflation problems of this instability.

Government Functions

The government sector undertakes expenditures to carry out specific functions. Some of the key functions are:
  • Common Defense: The defense of the country is a long-standing government function that involves the purchase of military equipment and the services of military personnel.

  • Education: Educating members of society is provided through public schools, higher education, and assorted job training programs that require an assortment of expenditures, especially teacher salaries.

  • Transportation: Transportation systems, including urban streets, interstate highways, subways, buses, railroads, and air transit, are either provided directly by the government sector or indirectly by the private sector with government assistance.

  • Public Health and Safety: Governments also devote resources and expenditures to public health and safety, including fire protection, police protection, disease control, and environmental quality.

  • Legal and Judicial System: A legal and judicial system that establishes the "rules of the game" is critical to the efficient operation of an economy, which also requires payments for lawmaker and judicial salaries, as well as assorted related expenses.

Purchases and Transfers

Government expenditures generally fall into one of two broad categories--purchases or transfer payments.
  • Purchases: The government sector annually purchases about 10 to 15 percent of the final goods and services produced by the economy, what is termed gross domestic product. This production is used by the government sector to pursue its assorted functions. That is, the government sector buys fighter jets to provide for the common defense or pays the salary of a health inspector to prevent the spread of disease.

  • Transfers: The government sector also devotes a portion of its expenditures to transfer payments. Transfer payments are basically gifts, payments that are made without any expectations of production. Common transfer payments include those made to members of the household sector for welfare, Social Security, or unemployment support.

Taxes and Borrowing

The government sector finances expenditures in a combination of two ways--taxes and borrowing.
  • Taxes: Taxes are involuntary payments to the government sector. Taxes are commonly placed on specific items or activities, including income, retail sales, and property. Fees or user charges, which are payments to the government sector for the purchase of specific goods or services (such as a drivers license), are also included in the general category of tax revenue. The bulk of the revenue used by the government sector for spending comes from taxes.

  • Borrowing: When the government sector has more spending than tax revenue, it makes up the difference through borrowing, that is, by selling legal claims through the financial markets. This borrowing, like taxes, ultimately comes from household sector income. However, in this case, the government sector must eventually repay the loans, which it does with future tax revenue.

Macroeconomic Instability

Business cycles are the recurring ups and downs of macroeconomic activity. The economy generally expands for a several years, then it contracts for a year or two. This macroeconomic instability can be triggered by a number of factors, including government expenditures by the government sector.

Government expenditures directly account for about 10 to 15 percent of annual gross domestic product through government purchases. Transfer payments to the household sector indirectly affects gross domestic product purchases through consumption expenditures.

All in all, a sharp increase in government expenditures can trigger a business-cycle expansion. A sharp decrease can then cause a business-cycle contraction. While such changes can and have triggered the ups and downs of business cycles, government expenditures are often look to as a means of stabilizing business-cycle instability caused by other expenditures, especially investment expenditures.

A business-cycle contraction, for example, can be countered by an increase in government expenditures. A business-cycle expansion can be countered by a decrease in government expenditures. These actions, are part of government stabilization policies that can be and have been used to address the problems of unemployment and inflation.

Government Times Three

The primary purpose of government spending is to perform the functions that society has relegated to the government sector. Some of those functions involve the purchase of goods and services, others do not. This suggests a distinction between two related terms government expenditures and government purchases. A third related term is the official government measure of government purchases--government consumption expenditures and gross investment.
  • Government Expenditures: This is the term for ALL spending by the government sector. It includes spending for the purchase of goods and services which falls under the title of government purchases. It also includes expenditures that are NOT for goods and services, which are termed transfer payments.

  • Government Purchases: This is the specific term referring to actual expenditures on final goods and services, or gross domestic product, by the government sector. It specifically excludes transfer payments.

  • Government Consumption Expenditures and Gross Investment: This is the official measure of the government purchases component of aggregate expenditures used in the calculation of gross domestic product This term reflects the fact that the government sector purchases both consumption goods and capital goods.


Recommended Citation:

GOVERNMENT EXPENDITURES, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2024. [Accessed: June 22, 2024].

Check Out These Related Terms...

     | government purchases | government borrowing | consumption expenditures | investment expenditures | net exports | taxes | investment | saving | investment borrowing |

Or For A Little Background...

     | government sector | government functions | public sector | stabilization policies | macroeconomics |

And For Further Study...

     | circular flow | business cycles | economic goals | macroeconomic sectors | macroeconomic markets | macroeconomic problems | macroeconomic theories | determinants | political views | ownership and control | political business cycles | property rights |

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