A. Suppose that in a year when GDP is rising rapidly you also observe the govern

Question

A. Suppose that in a year when GDP is rising rapidly you also observe the government budget balance increasing. How can you explain this correlation?
B. Now suppose instead that in a year when GDP is rising rapidly you also observe the Government budget balance decreasing. How can you explain this correlation? A. Suppose that in a year when GDP is rising rapidly you also observe the government budget balance increasing. How can you explain this correlation?
B. Now suppose instead that in a year when GDP is rising rapidly you also observe the Government budget balance decreasing. How can you explain this correlation?
B. Now suppose instead that in a year when GDP is rising rapidly you also observe the Government budget balance decreasing. How can you explain this correlation?

Explanation / Answer

A. Government budget balance is the difference between government revenues and expenditure. If increase in GDP increases the government budget balance it means that increase in GDP increases the revenue of government. Source of government revenue is taxation so increase in the production of commodity increases the tax on it and ultimately it raises the revenue of government and resulted in raising government budget balance.

B. If increase in GDP decreases the government budget balance then it means that government spends more on the infrastructure as compared to tax revenue from the production of goods and services in the economy. When government spends more and collects less revenue then, government budget balance of government will decrease.

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