The Impact of Government Expenditure on GDP, Employment and Private Investment A CGE Model Approach

The interaction of government expenditures with economic variableshas been the subject of long debates between pros and cons in allmajor schools of Economics. According to Classical extremists,government expenditure has no effect on GDP due to completecrowding out between government expenditure and investment. This isvehemently rejected by radical Keynesians that assert a fiscal expansionpolicy affects GDP in full. In this paper we will study governmentexpenditure effects on GDP and employment by a CGE model. It will beshown efficiency of government expenditure depends on kind ofexpenditure. The present paper divides government expenditures intotwo categories, consumption and investment expenditure. Alsoinvestment expenditure has been studied in five sectors: agricultural, gasand oil, construction, industry and mineral and service. The resultsconfirm that government expenditure influences on economy in differentways, depends on types of costs. Increasing the governmentconsumption expenditure causes reduction in production, employmentand investment. Government investment expenditure has differenteffects on economy that depends on which area they will be spent