What Are Government Purchases?
Let me explain what government purchases really are. They're the expenditures on goods and services made by federal, state, and local governments. When you add up all this spending—excluding transfer payments and interest on the debt—it becomes a major factor in figuring out a nation's gross domestic product, or GDP. Remember, transfer payments are things like Social Security, welfare, or subsidies to businesses that don't actually involve buying anything.
Key Takeaways
- Government purchases cover spending by federal, state, and local agencies, but they don't include debt payments or transfers like Social Security.
- These purchases are a core part of a nation's GDP.
- In Keynesian economics, you can use government purchases to increase overall spending and fix a sluggish economy.
Understanding Government Purchases
One way to calculate GDP—which measures the market value of all final goods and services produced in a country over a specific period and helps track economic health—is by summing up spending in four main categories: personal consumption, business investment, government purchases, and net exports.
The U.S. Bureau of Economic Analysis breaks this down further. For example, it separates government purchases into federal, state, and local levels, and it distinguishes defense-related federal spending from other types. It also subtracts imports from the final GDP figure.
Over recent decades, government purchases have increased in real terms. However, as a share of overall nominal GDP, they've been declining.
Special Considerations
In Keynesian economic theory, government purchases are essential for a healthy economy. You can increase or decrease this spending to regulate the business cycle. This boosts demand in two ways: directly through buying goods like steel for a bridge, and indirectly by putting money into the hands of workers and suppliers who then spend it—this is the multiplier effect.
That said, many economists oppose heavy government spending. They argue it distorts interest rates, supports uncompetitive firms, and leads to higher taxes, among other issues.
Types of Government Purchases
Government purchases include things like infrastructure projects, paying civil and public service employees, buying office software and equipment, and maintaining public buildings. Transfer payments, which don't involve actual purchases, are excluded from this category.
Here's a fast fact: In 2020, the BEA noted a rise in federal government spending, largely due to increased purchases of services for processing Paycheck Protection Program loans. While federal spending went up, state and local spending dropped. Overall, real GDP fell by an estimated 3.5% that year, amid crises and lockdowns.
