Government Spending

A world bank report in 2007 commented on the continuing need for major spending worldwide on infrastructure in everything from roads and railways to water and electricity generation. A) Explain the effect of national income when there is an increase in spending on infrastructure. B) Discuss whether an efficient allocation of resources can be obtained only if large scale investment is undertaken by the public sector rather than the private sector.

A) The national income of a country is the amount of money earned by that country. Thus the more money a country earns the higher its national income. The national income of a country can be found using three methods which are the expenditure, income and consumption methods. All three methods can be used as they all achieve the same thing which is determining the income of the country in question. For this example however I will use the income method to elaborate as it will be easier to both explain and understand. Before explaining, it is important to note that the income method only takes into account incomes which have been paid out for services rendered. The importance of this is to rule out transfer earnings as part of the income method in determining national income. Transfer earnings are income provided by the state to citizens who do not do a service or provide a good for that income. An example of transfer payments is unemployment cheques issued by the United States to its unemployed citizens. This is so because people who receive transfer earnings incomes do not contribute to the output of the country thus cannot be calculated as such. Now we have cleared this up, what this leads to is the circular flow of income in a country. Simply put, what this does is to basically show how income is exchanged for factors of production between households and firms. A copy of a simplified circular flow of income will be attached. In this flow of income, there are injections and withdrawals in the economy.