My book says that when the government spends money building homes for new immigr

Question

My book says that when the government spends money building homes for new immigrants, the value of I will rise. I thought it would say that the value of G will rise. (Can it be that they both will rise by the same amount?)

There is a formula that says:

G + Sg = T

which I thought means that taxes collected by the government are either spent (G) or saved (Sg), and if the government spends beyond what it collects in taxes we say that Sg gets a negative value. I thought all gov expenses are "G". Now I see I may be wrong.

This reminds me of when I read that if the gov builds a road, Sg rises. I thought that was a mistake. If it isn't a mistake, when is a gov expense called Sg and when is it called G?

I am confused. Please help. Thank you.

Explanation / Answer

Government spends on three things:

1: on goods and services

2: capital expenditure

3: transfers.

for caliculating GDP, only 1 and 2 are included, 3 is excluded as it is not a factor payment.

Government spending= government expenditure for consuming goods and services + capital investments.

capital investments include: constructing roads, buildings, houses.

Taxes= Sg + G is correct,

generally Transfers are not included in the equation as it is not given as factor payment. It is just a transfer of money from Government account to a designated person.

I= Gross private investment, it includes only the investments made by the private sector.

Here when governemnt spends in building houses, G( governmnet spending) will rise....

In economics there are different school of taughts.

there are two explinations for the changes in private investments (I):

Keynes explination:

When G increases, due to multiplier effect, the income increases, consumption increases and level of investment also increases.

Austrian economists: When the governemnt increases spending, this increases the debt, and this debt will be financed from the market, reducing money supply available for the private sector, decreasing private investments.

New findings:

In developed economies, the government spending will complement the private investments. So, an increases in G increases private investment (I)

In developing economies: Government spending, reduces the private investment I, due to crowding effect ( reducing money supply available to the private sector, as the money will be used for government funded projects).

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