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

The interaction of government expenditures with economic variables has been the subject of long debates between pros and cons in all major schools of Economics. According to Classical extremists, government expenditure has no effect on GDP due to complete crowding out between government expenditure and investment. This is vehemently rejected by radical Keynesians that assert a fiscal expansion policy affects GDP in full. In this paper we will study government expenditure effects on GDP and employment by a CGE model. It will be shown efficiency of government expenditure depends on kind of expenditure. The present paper divides government expenditures into two categories, consumption and investment expenditure. Also investment expenditure has been studied in five sectors: agricultural, gas and oil, construction, industry and mineral and service. The results confirm that government expenditure influences on economy in different ways, depends on types of costs. Increasing the government consumption expenditure causes reduction in production, employmentand investment. Government investment expenditure has different effects on economy that depends on which area they will be spent.