Government Purchases Definition, how it works and examples are discussed herein. You will find this article informative.
Government purchases can be defined as the disbursement and procurement of goods and services by the three arms of government which consist of the federal, state, and local governments.
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This is bringing together the sum of the government’s spending, which excludes the transfer of the sum of money paid in exchange for goods or services and interest on the debt.
This is a key factor to ascertain definitely or figure out a nation’s gross domestic product (GDP). Government purchases deal with the transferal of payments and expenditures that do not include the purchases of both Social Security payments and agricultural subsidies.
The term government purchases are mostly used by economists and analysts as a major component of a nation’s gross domestic product (GDP).
A model mostly used by economists is the Keynesian theory, a model in economics that explains government purchases intellectually.
The model explains that government purchase is a tool to promote the entire spending by ensuring that the economic activities are free from both microeconomic and macroeconomic problems.
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How Government Purchases works
When there is an indicator of the market value of all the final goods and services generated in a period of time within an economy’s boundary. It can also be used to monitor the balance of a nation’s economy and promote prosperity of the economy.
Government purchase works depending on its measure of GDP. Government purchase can be determined in three basic ways namely taxes, Current spending, Capital Spending, and Government Borrowing.
1. Tax collections by the government from both Direct taxes and Indirect taxes sources.
2. Capital spending
Capital spending is mainly for the long term and has to be renewed every fiscal year. The concept of capital spending can also be termed “social capital.” Capital spending works when there are government purchases on physical assets like roads, bridges, hospital buildings, and other equipment.
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3. Government Borrowings
The government mainly focuses on the funds its spends on the economy through tax revenues that it obtains. Moreover, when the revenue derived becomes inadequate to cover up for its duly assigned expenditures, it regenerates to borrowing.
Borrowing can be described based on its short-term or long-term conditions depending on its involvement in selling government bonds for example treasury bills can be issued into the money markets to assist in the raising of short-term cash.
Government borrowing can be sourced from its own citizens and borrowing money from foreign citizens including foreign bodies.
Examples of Government Purchases
There are several scenarios that portray government purchases such as:
If the government decides to supply goods and services without necessarily involving private individuals or generally the private sector, government purchases can be applicable to defense, construction of roads and major bridges, supply of goods to the building designed to diagnose and treat the sick, injured or dying handled by a staff of doctors and nurses to aid in the treatment of patients, and schools, and social welfare payments and payment made in accordance with an insurance policy or a public assistance scheme involving unemployment and disability assistance.
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When the government performs an advancement or growth in the promotion of a desirable economy, it can obtain a supply-side of the macro-economy by spending on certain areas such as education and brain drain.
Government purchases are mostly applicable when there is a need to purchase subsidies to assist industries that are in need of monetary aid for the process of expansion.
There are situations when the private sector is unable to comply with the financial necessity or prerequisite project because it is required or obligatory the public sector can play a vital part in borrowing required support.
For instance, transport infrastructure projects can not allure private finance except if the government makes provision for that industry.
When the government desires to redistribute income and enhance the social welfare of the citizens, government purchases are employed.
Conclusively, the fundamental component of Government purchases consists of those spending made by federal, state, and local agencies, with the exclusive of debt and transfer payments and from Social Security.
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Government purchase can be employed in the prevention of fraud, waste, and corruption, the policies of most nations prevent government procurement to a large extent.