A Quiz On National Accounts: Answers

In my previous post, I had the following questions:

  1. Can government expenditure be greater than 100% of gdp?
  2. Can Gross Fixed Capital Formation of an economy as a whole be negative?

The answer to both is yes. Commenters guessed the right answer and provided the example I was looking for (except the fourth below).

Here are examples to illustrate:

Government Expenditure

  • Open Economy: Imagine a small economy with a gdp of $1bn equivalent (easier to visualize than the United States with a gdp of $15tn having government expenditure greater than 100% of gdp). The government in one accounting period purchases weapons from abroad worth $2bn (maybe by sale of reserve assets or by increasing liabilities: irrelevant).
  • Closed Economy: Imagine if the government makes large transfers to households who are reducing spending drastically due to increasing uncertainties. They may eventually spend, but that’s eventually. For the accounting period, government expenditure can be large in principle than gdp. Remember, the p in gdp is for product(ion) and the standard formula “GDP = C + I + G” assumes that the government expenditure is for purchase of output and is not making transfers.

Gross Fixed Capital Formation

  • Open Economy: It’s a small economy with the private sector having few firms selling aircrafts abroad. During one period (such as a quarter), firms sell a lot of aircrafts – produced earlier – to the rest of the world and this makes the gross fixed capital formation negative.
  • Closed Economy: A bit more implausible than the above there examples but at least mathematically possible and that was what the question was. The example is firms selling huge amount of used cars to households. For households this is consumption and not capital formation. For firms, it is negative capital formation because cars used by firms is used in the production process and is counted as their fixed capital.

Of course, in the examples I ignore consequences (positive or negative) that may happen later.

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