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ADJUSTMENT, LONG-RUN AGGREGATE MARKET: Disequilibrium in the long-run aggregate market induces changes in the price level that restore equilibrium. If the price level is above the long-run equilibrium price level, economy-wide product market surpluses cause the price level to fall. If the price level is below the long-run equilibrium price level, economy-wide product market shortages cause the price level to rise. In both cases long-run equilibrium is restored. Price level changes induce changes in aggregate expenditures but NOT changes in real production. The reason is that long-run aggregate supply is full-employment real production, which is unaffected by the price level.
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                           GOVERNMENT SUBSIDIES: Transfer payments from the government sector to the business sector that do not involve current production. This is one component of the official entry government subsidies less current surplus of government enterprises found in the National Income and Product Accounts maintained by the Bureau of Economic Analysis that separates national income (the resource cost of production) and gross (and net) domestic product (the market value of production). Much like government makes transfers to the household sector to assist (presumably needy) individuals, government makes transfers to the business sector to assist (presumably needy) firms. Household transfer payments include welfare to the poor, unemployment compensation to the unemployed, and Social Security payments to the elderly and disabled. Business transfer payments (occasionally referred to as corporate welfare) include direct payments or tax deductions to business firms for a variety of reasons.- Specific Activity: Firms are often given subsidies to encourage particular actions, such as training employees, reducing pollution, implementing specific production techniques, or developing new technologies. Farmers receive federal subsidies to reduce the problems caused by unstable agricultural markets.
- Local Growth: State and local governments have a long history of inducing firms that employ a number of workers to locate in their areas through generous subsidies.
- Public Utilities: Privately-owned public utilities or quasi-public transportation systems are often subsidized by the government because they provide valuable production that cannot be profitably exchanged through markets.
- Bankrupt Firms: On occasion, a nationally prominent firm on the verge of bankruptcy is subsidized to help it through difficult times.
- Friends of Government: And more than a few special "breaks" have been inserted into tax laws by members of Congress on behalf of a particular firm that may or may not be the direct result of a hefty campaign contribution.
From a national income perspective, government subsidies are added to the pool of revenue that the business sector has available for making factor payments (which also makes it part of national income). But because the business sector does NOT receive this revenue as payment for producing goods, it is not part of gross domestic product.
Recommended Citation:GOVERNMENT SUBSIDIES, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2023. [Accessed: May 30, 2023].
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