How would gov't deficit spending that is directed toward "public capital" such as roads, bridges, dams, harbors, and industrial sites increase the expected rate of return on some potential private investment projects?
2007-01-02 10:48:13 · 4 answers · asked by Mystique 1 in Social Science ➔ Economics
GDP = consumption + investment + government spending + (exports − imports) .
The spending on "Public Capital" increases the governement spending componate of GDP thereby increasing the GDP.
2007-01-02 11:14:40 · answer #1 · answered by Giggly Giraffe 7 · 0⤊ 0⤋
I like the first answer the best. If I were answering this question, I would discuss how better infrastructure encourages people it to invest more in those areas where the infrastructure was improved. The reason for this is, ceteris paribus, better infrastructure will lead to a more productive workers, which will lead to a more productive business, which will lead to higher profits. Business are profit maximizing so they will build there factory/store/office where they think they can make the most money. Hope that helps!
2007-01-02 23:57:12 · answer #2 · answered by Sulli 2 · 0⤊ 0⤋
even more simpler and direct: the government doesn't go out of the Senate with spades and starts building a road; it pays a private enterpreneur to build it. So he gets the money for building it and his shareholders get more dividends on their shares.
If you are asking how it looks like in a macroeconomic model, I think it shifts the IS curve to the right (but that's not reliable, I had this course 3 years ago).
2007-01-02 19:01:20 · answer #3 · answered by Rumtscho 3 · 0⤊ 0⤋
here's the simplest example: if the government builds a road, and you build a shopping center and the road provides access for more people, your rate of return on your investment increases. Your suppliers can get there more easily and cheaply. You have access to more consumers and workers. You can pay your workers more, etc. Hope that helps!
2007-01-02 18:53:47 · answer #4 · answered by Angry Daisy 4 · 1⤊ 0⤋