Tag Archives: Government Expenditures.

An Economic Model

Dr. John Psarouthakis
Executive Editor

This is the introduction of a paper of mine published in a related journal that I will post in the Business Thinker when that can be done. The title of this article is “An Economic Model of Government Expenditures and Economic Development” The journal is Economics and Finance Notes.

The economy is a complex system in which firms, households  and government interact to determine the process of wealth creation and,ultimately, the economic well-being of the nation. Economic theory has traditionally focused on the analysis of each subsystem (firms, households and government), however it has created a high controversy in the study of the complete system behavior, as well as the relevant role of the government in the macroeconomic context. Despite this controversy, firms and governments share certain objectives. Both are social organizations created to add value for stakeholders and voters through, at least, reducing transaction costs in the economy.

Poor performance of governments tend to generate negative externalities for the economy (or higher transaction costs) that are reflected in macroeconomic variables such as output, involuntary unemployment, slowdown of profitability and capital creation and/or utilization, and increase in inflation. In other words, the economic performance of the overall system depends significantly on the government involvement needed to reduce transaction costs given the characteristics of the economy.

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