In the last module, we looked at three of
the most important issues in macroeconomics: inflation,
unemployment, and the rate of economic growth.
Let's finish up now with two equally important issues: the
large and chronic budget deficits that plague many nations,
and the equally large and chronic trade imbalances that exist around the globe among
nations with some nations running
large trade deficits and others running large trade surpluses.
Every year, national governments must live,
just like you and I do, with a budget.
On the revenue side, governments raise money
primarily through taxes ranging from those on consumption,
income, and property to payroll.
On the expenditure side,
the government spends money on national defense and
the building of infrastructure such as highways and bridges.
In many nations, the government also pays for social services like health care,
pensions, and housing assistance for the poor.
And, most nations must also expend funds on various forms of regulation: pollution,
unsafe working conditions, and monopoly abuses.
Note however, that unlike we as individuals,
a national government can run persistent budget deficits.
That is, a national government can spend more
than it raises in revenues in any given year.
Of course, over time,
a nation's annual budget deficits add up to the cumulative government or public debt.
Of course, one big reason national governments can run budget deficits is that,
unlike individual citizens who must stay within their budget,
they can sell financial instruments like
treasury bonds to the public to finance such deficits.
However, as we shall see in our lesson on budget deficits,
such deficits can exacerbate problems like inflation.
By driving up interest rates,
budget deficits can also slow down the rate of economic growth.
For example, when the government sells
bonds to the public to finance its budget deficits,
this can drive up interest rates.
Rising interest rates in turn,
can lower business investment because of the rise in the cost of borrowed funds.
Reduced business investment then slows down
the rate of growth in the real gross domestic product.
This is a phenomenon known as crowding out,
and we will talk more about the effects of crowding out on businesses in a later lesson.
For now, take a few minutes to study this figure before moving on.
Dr. Peter NavarroProfessor
