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Monday, September 12, 2005

The Size of Government over Time

This graph shows the expenditure components of GDP, consumption, investment, government spending, and net exports, as a percentage of GDP:

Expenditure Components as a Percentage of GDP

[These data are from the last slide of a PowerPoint presentation for chapter 18 of Economics by McEachern at this site.  The textbook is not one I've used.]

The graph in the textbook that is the source of these data presents this as though the yellow area is the government spending percentage and makes the point that the percentage of GDP arising from government expenditures declines slightly over time while the consumption percentage increases slightly over time.  But that's not quite correct, though the picture does not change much when this is accounted for.

The red area at the top is net exports and this value is negative when it is above the 100% line.  For example, let C=5, I=1, G=3, and NX=-2.  Then GDP=5+1+3-2=7.  In the graph, the part above the line is 5+1+3=9 and the red area would be 2 in magnitude. So the government spending percentage is actually the yellow area plus the red area not just the yellow area when net exports are negative (the yellow area is only 1/7 while government expenditures are 3/7).  Here's the same graph with both areas colored the same (though on the occasions when net exports are positive this would be misleading, but as is evident in the top graph these areas are very small in magnitude when they exist at all):

Expenditure Components as a Percentage of GDP

According to these data the size of government as measured as a percentage of GDP has remained relatively stable over time rather than falling.  However, these data do not support the claim that government has grown substantially larger over the last four decades as is often claimed...

    Posted by on Monday, September 12, 2005 at 02:34 AM in Budget Deficit, Economics | Permalink  TrackBack (0)  Comments (6)

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