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A note on government budgets.

Article Excerpt
Introduction

The analysis of government budgets has become quite common in economics classrooms. Indeed, examinations of the Federal government budget in particular are found in textbooks for principles, intermediate macroeconomics, and public finance courses. (1) As part of this discussion the distinction between cyclical and structural budgets and changes thereof is regularly made in order to differentiate between automatic stabilization and fiscal policy.

A re-examination of the standard pedagogical analysis suggests that it may be modestly extended. More specifically, it appears that cyclical changes in the government budget may be separated into a "revenue effect" and an "expenditure effect". While this distinction is implicit in typical textbook approaches and has been used for empirical measurement, (2) to our knowledge it has not been demonstrated graphically or used pedagogically. The purpose of this paper then is to demonstrate, with a graphical analysis appropriate for various undergraduate students, that cyclical changes in the government budget can be decomposed and stated as the sum of the expenditure and revenue effects....

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