ECO 403 MACROECONOMICS GDB NO. 1 Discussion and Solution Due Date: 19 November, 2015

The Case: Kenya is one of the fastest growing economies of Africa according to latest economic updates published by World Bank. In these updates, it has been reported that this economy needs sound economic policies for future improvement. Suppose Government of Kenya decides to implement the manifesto in a true manner and spirit. Long and short of this manifesto is that 35% of the government spending will be used on infrastructure (motorways, railways, dams and public places) while 45% of government spending will be used on education, health, promotion of cottage scale industry and welfare programs while remaining amount for weapon and defense. Requirement: Keeping in view the above facts and figures, analyze how would this government spending affect the income and consumption of the people of Kenya.
------------------------------------------------------------------------------------------------------------------------------------------------------------------
Solution :

Policymakers are divided as to whether government expansion helps or hinders economic growth. Advocates of bigger government argue that government programs provide valuable "public goods" such as education and infrastructure. They also claim that increases in government spending can bolster economic growth by putting money into people's pockets.

Proponents of smaller government have the opposite view. They explain that government is too big and that higher spending undermines economic growth by transferring additional resources from the productive sector of the economy to government, which uses them less efficiently. They also warn that an expanding public sector complicates efforts to implement pro-growth policies-such as fundamental tax reform and personal retirement accounts- because critics can use the existence of budget deficits as a reason to oppose policies that would strengthen the economy.

Which side is right?

This paper evaluates the impact of government spending on economic performance. It discusses the theoretical arguments, reviews the international evidence, highlights the latest academic research, cites examples of countries that have significantly reduced government spending as a share of national economic output, and analyzes the economic consequences of those reforms.¹ The online supplement to this paper contains a comprehensive list of research and key findings.

This paper concludes that a large and growing government is not conducive to better economic performance. Indeed, reducing the size of government would lead to higher incomes and improve America's competitiveness. There are also philosophical reasons to support smaller government, but this paper does not address that aspect of the debate. Instead, it reports on-and relies upon-economic theory and empirical research