Economics Concepts: Fiscal Policy and GDP

GDP is the market value of all goods and services produced in a country in a given year. This value arises from summing the total value of domestic consumption, investment, government spending and exports fewer imports. This year I contributed to the overall GDP when I bought five computers out of my personal savings so that I could start a neighborhood cyber café. This private investment will be included in GDP hence increasing it.

A Contractionary fiscal policy is imposed when the economy is at its peak in order to slow down the economy. This, the government does by increasing taxes and / or decreasing government spending. When government does this it reduces my disposable income meaning that, my personal spending on goods and services reduces as the government in form of taxes consumes most of my income.


If the government increases the tax on gasoline, this indirectly affects my financial security, as the Gas Company in form of high prices transfers the burden of tax back to me. The extra cost affects my disposable income by reducing it.

An expansionary fiscal policy is one imposed when the government reduces tax and /or increases government spending, in order to boost economic activity or avoid a recession. When the government reduces taxes, it means have more to spend on goods and services. Similarly when the government increases spending on its population peoples disposable income increase. The effect is that people have more money to invest and consume.

If the government reduces tax on personal income, I have more money to buy another computer to install in my cyber café hence financial security. On the other hand, I would save that money and enroll for part time schooling at the university thus personal security.

Keynesian economics believes in government playing an active role in the economy. This theory encourages deficit spending or total spending to influence output and correct inflation. The main variable the play with is aggregate demand. In contrast, classical economics believe in non-interference by government in the economy. They believe that the economy is able to self regulate back to full employment and full production by playing with wage variable.

Example of impact of classical

If the economy experiences unemployment, classical economics would advocate for cuts on wages. The employer would thus decide to reduce our wages o that more people would et employed therefore increase employment. The weakness of this theory is that wage cuts would face great resistance from employees and unions.

Example of impact of Keynesian

When the government raises corporate taxes, this will affect the employer’s decision in determining pay packages and probably the employer would decide to reduce fringe benefits accorded to employees because of the added tax. This leaves employees with less money to spend thus reducing demand of goods and services

When a country’s economy grows due to higher productivity and proliferation of more factories, qualitatively this has negative effects. This is because the quality of life reduces. People turn into robots with no social life. In addition, more factories mean pollution to the environment and diseases. Emission of green gases increases, thus further compounding the problem of global warming and unpredictable, adverse climatic conditions is often the result

When I got my job, I was exhilarated. I would earn a lot of money, move to a spacious apartment, buy a nice car and occasionally treat myself to a dance with my friends. However, the long working hours and the high sales targets reduced the quality of my life. Although my productivity is high, we have to work overtime inorder to exceed the company’s expectations. By the time I leave work, I am too tired to do anything. In addition, my social life has been reduced to nothing as we work all day throughout the week. There is no time to spend the hard-earned money. Consequently, I have ulcers and I am on medication.


Colander, D. (5th Ed). (2005). Economics. McGraw Hill.

Find out your order's cost