This article explains the relationship that exists between government spending and economic growth through the multiplier process. This is shown using the aggregate expenditure model. The model comprises of; total consumption expenditure (C), government purchases (G), net exports (X-M) and net investment (I). The article further explains that equilibrium in the macroeconomic model is attained when the aggregate expenditure (AE) is equal to the gross domestic product (GDP). From the article, little government expenditure facilitates high economic growth, while too much expenditure may lead to decrease in economic growth. The government should utilize the available resources in the most important sectors to increase the GDP. The article assesses the comparison between the aggregate expenditure and the gross domestic product of the U.S. and the European nations. The European nations have very huge aggregate expenditure (AE) than the U.S. On the contrary, the gross domestic product of the U. S. is relatively higher than that of the European Union. Although the tax revenues of the European Union are higher than that of the U.S., there is a very high debt in the EU which acts as the main cause for the shrinking economic growth.
In order for a country to realize a steady gross domestic product (GDP), the country must limit its aggregate expenditure (AE) by prudent utilization of the available tax revenues and avoiding debt financing in the recurrent expenditures. The concept focused on from the chapter is how government spending, which is a component of aggregate expenditure in the economy, can be used to stimulate economic growth.
Works Cited
Mitchell, Daniel J. "The Impact of Government Spending on Economic Growth." The Heritage Foundation. N.p., 2014. Web. 8 Apr. 2014.
http://www.heritage.org/research/reports/2005/03/the-impact-of-government-spending-on-economic-growth
