Government spending multipliers. State and economy

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:55

In the article below we will try to consider the multiplicative theory of public spending, which caused a lot of resonance and controversy at the time of the popularity of Keynesian teachings. The topic will be of interest to everyone who is not indifferent to the modern economy, because in the conditions of the shaky policy of various powers it is more relevant than ever.

The role of the multiplier theory in the modern economy

Often, in order for a country to justify its policy in the economic aspect, a number of macroeconomic instruments are used. Government spending multipliers are one of the components of this wide list, therefore they have an impressive theoretical background. For several centuries, many scientists have tried to uncover the meaning of this concept and use it within the limits of practical application.

In a broad sense, the multiplier shows the growth of economicindicators. And Russia's government spending is no exception. Representatives of Keynesian macroeconomic doctrine approached this concept more deeply, and it was they who reached the conclusion that this tool shows a direct relationship between the dynamics of national we alth and the level of well-being of the country's population, regardless of the direction of the latter's fiscal policy.

Autonomous spending and multiplier

The state and the economy are closely interconnected, so it's no secret to anyone that any changes in one institution always entail a certain dynamics of individual values of another. This process can be called induction, since only a small push of any of the financial instruments gives rise to a number of processes in the whole country.

For example, the autonomous spending of the state in the multiplicative theory is explained by the relationship with changes in the dynamics of the labor market. In other words, as soon as the government incurs certain costs in the context of some places of their occurrence, you can immediately observe a characteristic increase in the incomes of citizens. And, accordingly, an increase in employment. To obtain a quantitatively substantiated picture, it is enough to correlate the dynamics of these indicators with each other.

Investment costs

The structure of public spending is quite extensive, so it is worth paying due attention to the investment activity of the country, which is the basis of a he althy competitive economy.

Cartoonistinvestment costs shows the ratio of the dynamics of the level of investments in a particular innovative business to the level of variable operating costs. At the same time, it is considered correct to take into account only financial flows excluded from the gross national income.

In other words, according to a similar methodology, we will be able to track the level of expenditures incurred by the state in order to improve technological and scientific processes in the country, as well as their share in the overall economic flows. In general, there is nothing complicated in this dynamics - in the absence of investments, the level of consumption will be equal to zero, but with the growth of investments, it will increase.

Job market spending

The multiplier of government spending in terms of the labor market is a separate neo-Keynesian doctrine, which is difficult to compare with any other direction. Because, if earlier we positioned the total costs of the state as a secondary phenomenon, now let's see what the investment policy can entail, in addition to the results we are used to.

Corny, but few manage to trace the following relationship. Employment market costs are significantly reduced at a time when investment costs are rising. It follows that the well-being of the population is increasing, and, accordingly, the demand for non-essential goods (appliances, clothing, furniture) is expanding, giving rise to a positive trend in the change in the income of their producers. In other words, investments in one sector of the economy entailprofit growth in another.

Fiscal costs of the country

The multiplier of government taxes and spending in the fiscal aspect indicates the dynamics of changes in the level of output in the manufacturing sector, depending on the growth of the tax burden rate. As a rule, this coefficient is negative, since few business representatives want to give part of their net profit in favor of budget shares.

It's another matter when it comes to, for example, a differentiated tax on PE or personal income. In this case, the burden is imposed in stages - depending on the financial level of the object: the higher the welfare, the lower the rate. But, as modern practice shows, in a market economy, this theory is just a utopia, and has nothing to do with modern realities.

A balanced budget in general government spending

Public expenditure multipliers in their pure form show the dynamics of changes in the value of the gross national product, depending on how much of the state treasury was spent to purchase various types of products. Also, this indicator is inversely proportional to the marginal consumer propensity of the population. This can be explained by such an increase in budget revenue, when, with a reduction in its expenses, part of its profit is limited to the previous number of items.

Thus, we can derive a formula for a balanced budget: national spending can grow bya certain amount (let's call it A), which is caused by a cumulative reduction in the tax burden for entrepreneurs, and this, in turn, is fraught with an increase in the net profit of entrepreneurs by A units.

Country foreign trade costs

The public spending multiplier (the measurement formula varies depending on the key component, the dynamics of which we are trying to determine) also plays a significant role in the formation of an open economic policy. The latter is realized only through the use of export-import operations in practice. Therefore, we can say with confidence that foreign trade plays not the last, but rather a key role in the formation of costly items of state economic policy.

In the multiplicative theory, it is worth noting that the costs incurred by a country in order to implement export-import operations, aimed at indirectly interfering in the balance of another country, directly affect the value of the gross national product, which is a purely domestic instrument.

Thus, the value of the multiplier in terms of foreign trade is defined as the ratio between the quantitative changes in GNP and the costs of open transactions carried out outside the country.

Conclusions

Based on the foregoing, one very entertaining conclusion suggests itself. We tried to prove that government spending multipliers fully reflect the relationship in changes in key financial instrumentsstate economic policy. And we probably did quite well.

We were able to see that the balance of the budget is so shaky and susceptible to various elements of both domestic and foreign trade activities of the country, that we can say with full confidence: not a single process goes without a trace, and even more so autonomously. Government spending multipliers can always help us deduce the amount of growth in income, national product and many other indicators that indicate the economic he alth of the state.