International Finance Theory and Policy
by Steven M. Suranovic

Finance 50-4

Government Demand

Government demand refers to the government's demand for goods and services produced in the economy. In some cases this demand is for G&S produced by private businesses, as when the government purchases a naval aircraft. Other government demand is actually produced by the government itself, as occurs with teachers providing educational services in the public schools. All levels of government demand, federal, state and local, are included in this demand term. Excluded, are transfer payments such as social security, welfare assistance and unemployment compensation.

In this model government demand is treated the same way as investment demand: it is assumed to be exogenous. This means that its value is determined outside of the model and is not dependent upon any variable within the model. A simple equation for government demand can be written,

GD = G0

where the "0", or naught, subscript on the right side indicates that the variable is exogenous or autonomous. In words, the equation says that government demand is given exogenously as G0.

This is a more common assumption in many other macro models, even though one could argue dependencies of government demand on GNP and interest rates. However, these linkages are not likely to be as strong as with investment, thus assuming exogeneity here is a more realistic assumption than with investment.

International Finance Theory and Policy - Chapter 50-4: Last Updated on 1/20/05