What are Government Purchases
Government purchases are expenditures and gross investment by federal, state and local governments, excluding transfer payments and interest on debt.
BREAKING DOWN Government Purchases
Government purchases are a component of the expenditures approach to calculating gross domestic product (GDP). The equation is as follows:
GDP = C + I + G + NX
C = household consumption spending
I = business investment spending
G = government purchases
NX = net exports
For example, in 2016, the U.S. Bureau of Economic Analysis (BEA) measured the following nominal expenditures:
$12,820.7B (households) + $3,057.2B (businesses) + $3,267.8B (government) - $521.2B (net exports) = $18,624.5B (total GDP)
The BEA subdivides government purchases into federal spending, which is further divided into defense and nondefense spending; and state and local spending. Each category is split into consumption expenditures and gross investment. Examples of government purchases include defense equipment, infrastructure projects and payroll. Interest on government debt and transfer payments – Social Security, for example – are not included.
Government purchases have risen in real terms over recent decades:
As a share of overall nominal GDP, however, nominal government purchases have been falling:
Role in Keynesian Economics
Government purchases play a key role in Keynesian economic theory, which sees them as a key tool for regulating the business cycle. According to this theory, government spending boosts aggregate demand not only by directly creating demand – when the government purchases the inputs to build a bridge, for example – but by putting money in the pockets of workers and suppliers, who themselves go on to spend it on goods and services. This result is known as the multiplier effect.