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Government Purchases

25 April, 2016 - 09:12

The government-purchases component of aggregate demand includes all purchases by government agencies of goods and services produced by firms, as well as direct production by government agencies themselves. When the federal government buys staples and staplers, the transaction is part of government purchases. The production of educational and research services by public colleges and universities is also counted in the government-purchases component of GDP.

While government spending has grown over time, government purchases as a share of GDP have declined from over 20% to under 20%. After 2000, though, the percentage of government purchases in GDP began to increase back toward 20%, as military spending picked up.

Figure 27.1 shows federal as well as state and local government purchases as a percentage of GDP from 1960 to 2007. Notice the changes that have occurred over this period. In 1960, the federal government accounted for the majority share of total purchases. Since then, however, federal purchases have fallen by almost half relative to GDP, while state and local purchases relative to GDP have risen.

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Figure 27.1 Federal, State, and Local Purchases Relative to GDP, 1960–2007

Government purchases were generally above 20% of GDP from 1960 until the early 1990s and then below 20% of GDP more recently. The share of government purchases in GDP began rising again in the 21st century.

Source: Bureau of Economic Analysis, NIPA Table 1.1 and 3.1 (December 23, 2008 revision).