Free Gross Domestic Product Essay Example
Type of paper: Essay
Topic: Government, Politics, Money, Taxes, Investment, Public, Deficit, Spending
Complete Name of Professor
The expanded role of the government has brought about important developments in our economy. The Federal Government encompasses our individual lives. Gauging its size and extent to gain some idea of its monumental and increasing influence takes a lot of methods. Maybe the easiest is to refer to few statistics, pick out few government agenda and programs that highlight the extensive range of the economic-financial undertakings and responsibilities of the government today.
Public economics provides reasons why the government needs markets in order to distribute resources: First, the establishment of a safety net in order to protect the welfare of the poor; second, the rectification of externalities such as the excessive emission of carbon-rich gases; third, the government’s responsibility to provide healthcare and education to all its constituents; and the provision of funding for scientific and technological research for future advancements, and which cannot be easily seized by private stakeholders. The free-market system poses a tendency to provide below the resource in query – public spending to support the poor, reduction of carbon gases in the atmosphere, affordable healthcare services, or the establishment of renewable energy.
Following ten years of macroeconomic uncertainty, the then President Ronald Reagan took the presidential seat with the objective of contracting the public sector to free resources. Revenues of the Federal government grew steady as a part of the national income between the years 1981 and 2008, with 18% of the GDP for revenues and 21% for the GDP outlays. In most cases, the people balked at the idea of abatement on public spending programs but were also resistant of increasing the taxes. Because the US has lower taxes, spending is relatively lower at 38% of the Gross Domestic Product; and therefore the deficit is relatively higher affecting unemployment rate. Just as the government have to expand its role, there should have been an increase in taxes; however, the steady condition of tax and spending affects the working sector.
Budget deficit occurs when the government spending is more than the revenue it generates from taxes. Sustained budget deficit can really create serious economic problems such as the accumulation of public debt. Once the deficit can no longer be sustained, it will result to rising bond yields or higher interest rates and will also affect the confidence in a government. Also, if the deficits can no longer be sustained, the government may be compelled to go on default.
What happens when there is a budget deficit is that (1) there will be an increased borrowing. Because the government do not generate enough funds to support its public spending, it will have to borrow money from the private sector (2) private sector will impose higher interest rates; selling bonds will accumulate public debt.
Sustained budget deficit can lead to crowding out effect. Because governments do not generate much income to finance its programs, it will have to increase taxes so much that it may leave businesses or the private sector with less money. It happens when the government funds its programs by the use of deficit spending from money borrowed from the private sector. When the government spends on social welfare program such as MedicAid, private sector will have less incentive to invest in the same programs because of higher taxes required.
Public borrowing is definitely not good for the savers. Because the government will have to require higher taxes, people in the working sector will have lesser incentives at the end of the day.
Increasing interest rates will bring positive impact to savers because it will yield their money on the bank with the higher incentives. It will grow your savings even more. However, if you have a credit card or have subscribed to a loan or a mortgage, it would terribly hurt you because it increasing interest rates means an exponential rise in your regular payment for loans and mortgages.
Rising interest rates are actually good signs that the economy is performing very well. It also means that banking firms will have more income from its pay savers from the saving accounts and from debts with high rates. But let us say private sectors or companies will not borrow money when the interest rates are high because it would be very costly for them to pay. Hence, savers = happy; companies = not happy.
But how is interest rates related to unemployment and GDP? Well, basically firms and companies borrow money from banks to finance their business expansion. If the interest rates are high, they may postpone the expansion in a while or will not push through with the expansion at all – which means that it intercepts the potential number of jobs that could have been offered when the expansion pushed through.
How is it related to GDP? GDP is influence by economic activity. The more people spend, the more it stimulates the economy and the more the GDP will rise. If there are higher interest rates, it will increase savers money so they may spend more on products; however, it will also affect business firms because they will not borrow money from the banks – which means there is less jobs and less incentives.