Government Functions

• Common Defense: The defense of the country is a long-standing government function that involves the purchase of military equipment and the services of military personnel.


• Education: Educating members of society is provided through public schools, higher education, and assorted job training programs that require an assortment of expenditures, especially teacher salaries.


• Transportation: Transportation systems, including urban streets, interstate highways, subways, buses, railroads, and air transit, are either provided directly by the government sector or indirectly by the private sector with government assistance.


• Public Health and Safety: Governments also devote resources and expenditures to public health and safety, including fire protection, police protection, disease control, and environmental quality.


• Legal and Judicial System: A legal and judicial system that establishes the "rules of the game" is critical to the efficient operation of an economy, which also requires payments for lawmaker and judicial salaries, as well as assorted related expenses.

Purchases and Transfers

• Purchases: The government sector annually purchases about 10 to 15 percent of the final goods and services produced by the economy, what is termed gross domestic product. This production is used by the government sector to pursue its assorted functions. That is, the government sector buys fighter jets to provide for the common defense or pays the salary of a health inspector to prevent the spread of disease.


• Transfers: The government sector also devotes a portion of its expenditures to transfer payments. Transfer payments are basically gifts, payments that are made without any expectations of production. Common transfer payments include those made to members of the household sector for welfare, Social Security, or unemployment support.

Taxes and Borrowing

• Taxes: Taxes are involuntary payments to the government sector. Taxes are commonly placed on specific items or activities, including income, retail sales, and property. Fees or user charges, which are payments to the government sector for the purchase of specific goods or services (such as a drivers license), are also included in the general category of tax revenue. The bulk of the revenue used by the government sector for spending comes from taxes.


• Borrowing: When the government sector has more spending than tax revenue, it makes up the difference through borrowing, that is, by selling legal claims through the financial markets. This borrowing, like taxes, ultimately comes from household sector income. However, in this case, the government sector must eventually repay the loans, which it does with future tax revenue.

Macroeconomic Instability

Government expenditures directly account for about 10 to 15 percent of annual gross domestic product through government purchases. Transfer payments to the household sector indirectly affects gross domestic product purchases through consumption expenditures.

All in all, a sharp increase in government expenditures can trigger a business-cycle expansion. A sharp decrease can then cause a business-cycle contraction. While such changes can and have triggered the ups and downs of business cycles, government expenditures are often look to as a means of stabilizing business-cycle instability caused by other expenditures, especially investment expenditures.

A business-cycle contraction, for example, can be countered by an increase in government expenditures. A business-cycle expansion can be countered by a decrease in government expenditures. These actions, are part of government stabilization policies that can be and have been used to address the problems of unemployment and inflation.

Government Times Three

• Government Expenditures: This is the term for ALL spending by the government sector. It includes spending for the purchase of goods and services which falls under the title of government purchases. It also includes expenditures that are NOT for goods and services, which are termed transfer payments.


• Government Purchases: This is the specific term referring to actual expenditures on final goods and services, or gross domestic product, by the government sector. It specifically excludes transfer payments.


• Government Consumption Expenditures and Gross Investment: This is the official measure of the government purchases component of aggregate expenditures used in the calculation of gross domestic product This term reflects the fact that the government sector purchases both consumption goods and capital goods.