What role does Government spending play in GDP? What happens when it spends less?

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What role does Government spending play in GDP? What happens when it spends less?

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Answer 1

Answer #1

The GDP can be defined the market value of all goods and services which are produced in the domestic territory of the country in the current financial years.

GDP=C+I+G+X-M

Government by changing its expenditure and taxes changes the equilibrium level of income (GDP).

Hence government can affect GDP by changing either government spending or taxes.

When government spends less, then the equilibrium level of GDP also decreases. But change in the GDP is multiple times of the change in the Government purchases due to spending multiplier effects.

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Answer 2

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What role does Government spending play in GDP? What happens when it spends less?

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