Abstract
This paper analyzes the relationship between final consumption and government spending, using the correlation and linear regression model. The objective of the research is whether government expenditures are complementary, substitute, or not related to private consumption to give positive effects on the economy. Methodology, quantitative secondary data were obtained from the World Bank, for five countries and processed with SPSS, 21. The empirical analysis was verified through, Bivariate and Partial correlation and normality test. The Result, first, shows that government spending complements and replaces final consumption. Second, it is also confirmed that even when interacting with other variables, the complementary effect of final consumption is not eliminated despite the shocks coming from government spending. Third, by adding other variables to the model, the issue of complementarity and substitutability of the two main variables is not lost. As a result, findings, confirm that private consumption (InCt) and government spending (InGt), Gross Savings (GS), and per capita income (GDPpc), are in statistically significant and positive relationships with each other. The novelty of the paper is, government expenditures cause an increase in private consumption is to high value, showing the complementary effect of government expenditures on private consumption. Based on health expenditures, education, public order, internet provided by the state have increased the demand of families for these services, causing an increase in the share of services provided by the private sector.JEL Classification: E21; H5; E2; R0. Doi: 10.28991/esj-2021-01292 Full Text: PDF
Highlights
Government spending on overall economic activity is one of the most controversial issues in any economy
This study showed that the two indicators tax increase and unsustainable policies are factors that prevented the efficiency of government spending on private consumption
If we find a significant relationship between the three variables and suspect that the correlation between private consumption and government spending is the result of their individual relations to GDP per capita (GDPpc), we remove the assumed linear relationships between C-GDPpc, and between Gross Savings (GS)–GDPpc
Summary
Government spending on overall economic activity is one of the most controversial issues in any economy. Authors in their studies have found evidence that government spending has cumulative effects (replacing each other) and is positively related in most cases [1, 2]. Most households in the sample countries, in addition to disposable income from the public sector receiving from salaries (employees), receive income from remittances (from their families abroad) increasing the general demand, while the private sector in the above growth has affected the growth of employment. With low per capita income in most countries, it is challenging to have a direct effect of final consumption on government spending. It is important to note that there is an income inequality among the population where some have above-average incomes, the economy has not benefited from the higher population income; they save or invest more compared to the population with that low income which spends income on consumption
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