Part one
How has the composition of federal and state and local government spending changed over the past 40 years? What social and economic factors might have contributed to this change in how governments spend their funds?
The government has been changing its spending in the last forty years. In 1970’s almost half of federal spending was on defense and around 15% on healthcare and social security. Fast forward, in 2000’s health spending and social security exceeded spending on defense. In 2001 expenditure on defense fell below 20% the total federal budget. Besides, health spending by state and local government has doubled over the same period. The expenditure on health and various social services has been increasing since 1960 (Moore 1). This increased spending on health and social services is attributable to an aging population and increasing need for quality health programs. The baby boom generation has aged, and the government must channel more funds to the increasing number of old people. The increase is also attributed to introduction ObamaCare program and expansion of Medicaid (Moore 1). The improved health programs ensure the nation has health and strong labor force that will contribute to economic growth and development. The decrease in defense spending is attributable to the collapse of the Soviet Union and the end of cold war. Federal spending on education was 5.7% in 1976. However, this increased to over 6% of total government spending in 2010 (Fraser 1). The increase is made to improve the quality of learning and skills for the labor force.
Question 2
How might the government intervene? Is a normative question, its solution will provide some economic action that will be done to arrive at a solution.
Why does the government need to intervene? Is a normative question, its answer will provide a statement judging whether the current economic situation is unfavorable to warrant government intervention.
When should the government intervene in the economy? Is a positive question, it tries to provide answers on causes of government intervention in the economy.
What is the effect of those interventions on the economic outcome? Is a positive question, its answer provides statement falling under cause-effect relationship.
Part 3
The present value can be got using the following formula for each installment
Pv = fv (1+i)-n
After second year PV = 70000( 1)-2 = 70000 and this happened to all the years.
NPV = 70000*5-126000- 225000 = -1000. The project should not be undertaken at 0%.
At 2.5 %
Pv = fv (1+i)-n
Cost of disposing
Pv = 125000 (1-0.025)-5
Pv= 125000(0.975)-5 = 141875
Installments
PV =P ( 1-(1+r)-nr)
P = installments
N= periods
R = rate
PV =P ( 1-(1+r)-nr)
PV = 70000(1-(1+0.025)-50.025)
= 325208
NPV = 325208 – 126000- 141875 = 57333
The project should be undertaken because it has a positive net present value.
At 5 %
PV =P ( 1-(1+r)-nr)
PV= 70000 (1-(1+0.05)-50.05) = 303063
Pv = fv (1+i)-n
Pv = 125000 (1+0.05)-5 = 97941
The project should be undertaken because it has a positive net present value.
At 10%
PV= 70000 (1-(1+0.1)-50.1) = 265355
Pv = 125000 (1+0.1)-5 = 77615
NPV = 265355-126000-77615 = 61740
The project should be undertaken because it has a positive net present value.
NB/ assume that income installment is received at the end of the year.
Part 4
Maintenance expense is set at the start of the period. Thus, we apply the formula of present value of annuity due.
P= 400M
N = 10
r= 4%
PV =P+P ( 1-(1+r)-(n-1)r)
Pv = 400 +400(( 1-(1+0.04)-(10-1)0.04) = $3,374,132,644.21
The expense saved is less than 4 B so the project should not be undertaken. The project should not be undertaken because it has a negative net present value.
At 0%
P= 400M
N = 10
r= 0%
PV =P+P ( 1-(1+r)-(n-1)r)
Pv = 400 +400(( 1-(1+0.-(10-1)0) = 4 billion
The project doesn’t add any value so there is no need of undertaking the project. It is at point of indifference.
At 8%
P= 400M
N = 10
r= 8%
PV =P+P ( 1-(1+r)-(n-1)r)
Pv = 400 +400(( 1-(1+0.08)-(10-1)0.08) = $2,898,755,164.34
The expense saved is less than 4 B so the project should not be undertaken. The project should not be undertaken because it has a negative net present value.
The politician argument is not based on time value of money. The country does not get any economic benefit by implementing projects that have negative present value. The interest determines the cost of funds utilized in the project.
Part 5
Selling a piece of land under cash system of accounting leads to increase in revenue. Besides, spending the cash received on a foreign expense leads to increase of expenditure. The all the revenue received from the sale of land is spent on victims of an earthquake. This means that the transaction neither creates a deficit nor a surplus (Bougrine 20).
In capital accounting system the revenue and expenditure will increase. However, the sale of land leads to decrease in the country’s assets. Besides, the money is not used to acquire any other asset for the country (Bougrine 23). This means that the deficit will increase.
References
Bougrine, Hassan. The economics of public spending: debts, deficits, and economic performance.
Cheltenham, UK: Edward Elgar Pub., 2000. Print.
Fraser, Alison . "Federal Spending by the Numbers - 2012." The Heritage Foundation. N.p., 2013. Web.
29 Jan. 2017. <http://www.heritage.org/research/reports/2012/10/federal-spending-by-the-numbers-2012>.2017. <http://www.heritage.org/research/reports/2012/10/federal-spending-by-the-numbers-2012>.
Moore, Stephen. "The Growth of Government in America." FEE Freeman Article. Foundation
for Economic Education, 01 Apr. 2010. Web. 29 Jan. 2017.
