Government Purchases

Published Jan 1, 2023

Definition of Government Purchases

Government purchases are the goods and services that the government (national, state, and local) buys from the private sector. That means it includes all the goods and services that the government buys from businesses, such as construction services, military equipment, and office supplies.

Example

To give an example of government spending, let’s look at an imaginary country called Purchasia. Now assume that to improve traffic infrastructure, the government of Purchasia decides to build new roads and renovate existing ones. To do that, it needs both raw materials (e.g., asphalt, concrete) and manpower to actually build the roads. Thus, it contracts a bunch of local companies to supply all that. The money the government spends on these private contractors to build the roads is considered government spending.

Why Government Purchases Matter

Government purchases are an important part of the economy. They can have a significant impact on economic growth, employment, and inflation. For example, when the government increases its purchases, it increases demand for goods and services, which can lead to an increase in economic growth. This can be helpful in a period of economic slowdown. Similarly, when the government reduces its purchases, it can lead to a decrease in economic growth. This can be a viable strategy during times of high economic growth.

That means the government can use its spending patterns to flatten economic booms and busts by decreasing purchases during booms and increasing government spending during busts. This is called counter-cyclical spending.