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C + (I + B) (Y T) - (1.8)

The document discusses household income accounting in an economy where the government is running a deficit. It shows that household income net of taxes (Y - T) is either consumed (C) or saved through investment (I) or government bond purchases (B). Government bond purchases represent household saving since bonds commit the government to future repayment. The household budget constraint implies that GDP is equal to consumption (C) plus investment (I) plus taxes (T) plus new government debt (B). Therefore, overall government spending (G) equals tax revenue (T) plus new debt issuance (B), and government deficits do not affect accounting of total government spending.

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41 views1 page

C + (I + B) (Y T) - (1.8)

The document discusses household income accounting in an economy where the government is running a deficit. It shows that household income net of taxes (Y - T) is either consumed (C) or saved through investment (I) or government bond purchases (B). Government bond purchases represent household saving since bonds commit the government to future repayment. The household budget constraint implies that GDP is equal to consumption (C) plus investment (I) plus taxes (T) plus new government debt (B). Therefore, overall government spending (G) equals tax revenue (T) plus new debt issuance (B), and government deficits do not affect accounting of total government spending.

Uploaded by

Akash Kumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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are also not related to government tax surpluses or deficits.

Suppose
we are in an economywhere the government is running a deficit and is
financing purchases via some fresh debt in addition to income taxes.
Also suppose for simplicity that net exports (X − M) in the economy
are zero. Assuming households use what is left of their income
to purchase consumption or investment, or to purchase the newly
issued government debt, income accounting at the household level
looks like:
C + [I + B] = [Y − T] . (1.8)
Disposable income, income net of taxes collected by the government,
is defined as Y − T. This income accounting equation simply says
that income net of taxes (Y − T) is either consumed C or saved by
households. Households save when they purchase new investment
goods I or purchase bonds from the government B. Government
bonds are a form of saving by households since the government is
committing to repay the bonds, with interest, at some point in the
future. In this example, we have assumed, for simplicity, that all new
debt that the government issues B is bought by households in the US.
Since we have set X − M = 0, we can use equation (1.7) to rewrite
the household budget constraint in a way that makes GDP accounting
clear. As long as aggregate pre-tax household income Y is equal to
GDP, then
C + I + [T + B] = Y.
Thus, NIPA accounting implies that government spending G is equal
to tax revenues raised plus net debt issuance, T + B. The fact that the
government did not collect enough tax revenue to finance its spending
does not affect our accounting of overall government spending.
If you stare at equation (1.8) long enough, you might convince
yourself that government deficits B crowd out (replace) private

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