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Government expenditure include a government’s spending on health care, education, infrastructure, security, public servants’’ salaries and other services which it offers to the public. GDP…
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Research Proposal Effect of Government Expenditure on Economic Growth of USA Introduction Government expenditure is avital component of gross domestic product (GDP). Government expenditure include a government’s spending on health care, education, infrastructure, security, public servants’’ salaries and other services which it offers to the public. GDP measures economic growth. Government expenditure is a good measure of the level of influence which the government has on the economy. A strong relationship between government expenditure and economic growth shows that the economy is highly dependent on the government. A weak relationship shows that the government has little influence of economic affairs of a country. Researchers have had varying opinions on this subject. The purpose of this research is to determine the impact of government expenditure of economic growth of USA in order to eliminate the confusion revolving around this phenomenon.
Research Objectives
To determine whether there is any relationship between government expenditure and economic growth in USA
To find out the effect of government expenditure on economic growth in USA
Research Questions
Is there is any relationship between government expenditure and economic growth in USA?
What is effect of government expenditure on economic growth in USA?
Literature Review
USA has the largest national economy. Its nominal GDP was estimated to be $15.8 trillion in the third quarter of 2012. This represents a quarter of the global nominal GDP. The 2007 credit crunch in the world began in the US economy leading to serious economic problems such as increased levels of unemployment and high levels of public debt. This led to increased government intervention in the economy to fasten recovery from the recession. Government intervention came in the form of increased expenditure in stimulus programs and change of macroeconomic policies. The total expenditure in 2012 was $3.796 trillion and has been on the increase throughout the past decade (Federal Reserve Bank of St. Louis 24).
According to Keynesian economics, an increase in government expenditure causes an increase in GDP via the multiplier effect. According to Keynes, GDP is a function of consumption expenditure, investment expenditure, government expenditure and net exports. There is therefore a positive relationship between a government expenditure and economic growth (Stefan and Magnus 1510). However, researchers have had different views on this subject. According to by Richard Rahn, government spending lead to increased economic growth up to some optimal level above which the economy begins to contract. Proponents of the Rahn curve theory suggest that optimal government expenditure should be between 15% and 25% of GDP (Surhone, Tennoe, Henssonow 10). In a study comparing the Anglo-American Model and European Models, James, Robert and Randall (20) studies the impact of government structure and size on economic development. The paper concludes that the government is able to enhance growth by increasing this variable. Nevertheless, too much of its influence retards growth as government utilizes more and severely reverses the gains of the advanced incentive structure. Chi-Hung and Hsu (451) in their research titled "The Association between Government Expenditure and Economic Growth: Granger Causality Test of US Data, 1947~2002" conclude that government expenditure should be increased with the main object being economic growth. There study’s results are consistent with Keynesian’s theory which shows a similar relationship.
The study will employ secondary data of economic variables such as the government spending and GDP from the year 1970 to 2000. This period was not marked by major economic turbulences such as world wars and economic downturns. Correlation analysis will be employed to determine whether there is any relationship between government expenditure and economic growth in USA. To find out the effect of government expenditure on economic growth in USA, a regression model will be estimated in the form of Y = C + I + G + (X − M) where; C = consumption, I = private investment, G = government spending, (X − M) = Net exports and Y = GDP. This model will be a good predictor of GDP from levels of economic growth.
Works Cited
Chi-Hung, Louis and Chiehwen Hsu. "The Association between Government Expenditure and Economic Growth: Granger Causality Test of US Data, 1947~2002" Journal of Public Budgeting, Accounting, and Financial Management 20.4 (2008): 439-452.
Federal Reserve Bank of St. Louis. “National Economic Trends (Nominal GDP)" December 20, 2012.
James, Gwartney, Lawson Robert, and Holcombe Randall. The Size and Functions of Government and Economic Growth. Joint Economic Committee. U.S. Congress. April 1998, p. 20.
Stefan, Fölster and Henrekson Magnus. "Growth Effects of Government Expenditure and Taxation in Rich Countries." European Economic Review, Vol. 45, No. 8 (August 2001), pp. 1501-1520.
Surhone, Lambert, Mariam T. Tennoe, Susan F. Henssonow. Rahn Curve. London: Betascript Publishing, 2010. Read More
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