Consumption and Expenditure

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Consumption and Expenditure

Question One

Government spending in the past century has changed in two major ways. In one, expenditure has transitioned from the provision of goods and services to household payments. According to the article, public investments are fading because on the economic pressures in entitlements. Fifty years ago, investment spending was two and a half times the size of entitlements. Presently, expenditures on entitlements are thrice the size of investment spending. The Great Inversion is the factor that resulted in the trend and it suggests it will only continue to accelerate given Baby Boomer retirements that are at a higher growth rate than inflation and wages. The second change in government expenditure is the little focus on investment spending. Through an analysis of annual spending numbers over the last fifty years, the trend identified is that investment spending has reduced by two thirds. The budget for investment is a third its initial number half a century ago. Annual numbers suggest that the trend is likely to continue to near 5% in the next few decades. Government spending in the past century shows that the relationship between national consumption and investment are inversely proportional. A rise in one leads to a fall on the other and vice versa.

Question Two

Government spending in its classification on whether it is an investment or consumption relies on the nature of the return. Consumptions are government spending that satisfies individual or group requirements through the purchase of various goods and services. An example of a consumption as seen in the article is the growing rate of expenditure on entitlements. On the other hand, investments are government spending in goods and services that in turn derive future benefits. An example of a government investment as seen in the article is education and research. The two fields offer future benefits in the form of an expert workforce and information intelligence respectively. A combination of government investment and consumption generate the gross domestic product of a country.

Question Three

The national debt has been a significant subject of the American domestic and budget policies given its high levels of controversy. A budget deficit that results in national debt occurs when the government expenditure is more leaned on consumption as opposed to investment. In detail, the country spends more money than the national income it generates. If the government balance between net taxes and spending is positive, we have a budget surplus, otherwise we have a budget deficit. Income generating activities such as taxation and research are insufficient to cater for the national spending. The national debt adversely affects the population by crippling productive investment and adding risk to the debt crisis.

Crowding out refers to government borrowing from the private sector in order to pay its debt. This reduces private spending therefore reducing the stock of capital goods. In this, the economic growth rate is lower than its normal or expected level. A slow economy cripples the future generation as they are burdened by the requirement to pay the national debt. If the gross domestic product of the present and future generation is at equal or lower level to the national debt, individuals get to enjoy little or no amounts of the economic ‘pie’. The public accepts issuance of debt therefore a big national debt results in greater taxation rates and price inflations.

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