Answer to Question #194428 in Macroeconomics for afrena

Question

(a). Plot the growth rates of Malaysia’s GDP (constant 2010 US$) and the growth rate of Malaysia’s general government final consumption expenditure (government purchases) from 1960 to 2019 (constant 2010 US$). Calculate these growth rates from annual data. (i). Explain in your own words if there appears to be any relationship between the growth rates in GDP and in government purchases. (ii). Explain in your own words what your answer to part (i) tells you about the role in business cycles of fluctuations in government purchases. Answer this question using the World Bank World Development Indicators database, accessible at https://databank.worldbank.org/source/world-development-indicators#. Note: Report a table containing both growth rates for each year from 1961 onwards. Words and numbers in the reported table are excluded from the word count. 

Answer 1

Relationship between the GDP growth rate and General government final Expenditure

In the case of Malaysia, there appears to be a direct relationship between the GDP growth rate and general government expenditure. As the GDP grows the general government final expenditure also increases proportionately over the years.

Role in business cycles of fluctuations in government purchases

Government expenditure (purchases) refers to the amount of money the government spends in the activities of acquiring goods and providing services. These services include but not limited to;

Education

Healthcare

Defense.

When government expenditure hits an all-time high, the economy suffers several repercussions such as an increase in the interest rates since there are no savings in the economy. This results in the recession phase of the business cycle

Decrease in the government expenditure results in the expansion phase of the business cycle. Here we have the following impacts; increase in production and employment thus increasing incomes and spending of people and businesses.

Between the recession periods and expansion phases there are peaks and troughs as shown in the figure below.