Economic Concepts: Demand, Supply, Public Finance
Aggregate Demand: Definition and Curve
Aggregate Demand refers to the total amount of goods and services that economic operators are willing to purchase at different price levels over a specific period.
The Aggregate Demand Curve Explained
The aggregate demand curve illustrates the quantity demanded of goods and services for each general price level. The amount of output, measured on the horizontal axis, represents the sum total of goods and services produced in the economy. The vertical axis displays the general price level. The demand curve has a negative slope, indicating that as the general price level in the economy lowers, the quantity demanded increases. Variations in the general price level lead to changes in quantities demanded, which are represented as movements along the curve.
Aggregate Supply: Definition and Curve
Aggregate Supply is the total amount of goods and services that companies within a country are willing to produce and sell at various price levels.
The Aggregate Supply Curve Explained
By observing the production levels that companies are willing to offer as prices change, we derive the aggregate supply curve. Production, or output, on the horizontal axis, represents the sum total of goods produced in the economy. The vertical axis, similar to aggregate demand, shows the general price level. The curve has a positive slope, reflecting that higher prices generally lead to increases in production.
The Shadow Economy Defined
We can define the Shadow Economy as the part of economic activity that is not declared for tax or occupational purposes and, therefore, is not included in the Gross Domestic Product (GDP).
Public Sector, Taxation, and Government
Government Structure and Funding
The government comprises the central government (formed by the State and autonomous agencies, which oversee the bulk of government revenue), territorial governments (constituted by autonomous communities and local government), and social security. Public administrations are principally funded through taxes, while social security is financed by social contributions.
Role of Public Undertakings
A public undertaking's mission is to achieve, through its participation in markets, certain key objectives for the country's economy, such as the control of strategic productive sectors.
European Union Institutions
The European Union institutions also play a significant role in the broader public sector context.
Public Spending: Classification and Impact
Public Spending refers to the set of all expenditures incurred by the general government.
Functional Classification of Public Spending
Government expenditures can be classified with a functional approach, adding the cost of all public authorities and regardless of public debt. In Spain, for example, typical allocations include:
- 34% Social Security: Pensions, unemployment benefits, and other social benefits and assistance.
- 14% Health Spending
- 13% General Services: Primarily paid staff.
- 11% Education Spending
- 11% Economic and Investment Issues: Includes policies to boost productive sectors of the Spanish economy and investment in infrastructure.
- 5% Public Order and Public Safety
- 4% Cultural and Recreational Expenses
- 3% Housing and Community Services
- 2% Environmental Protection
Types of Public Expenditures
Public spending can also be categorized by type:
- Current Expenditures (or Consumption): Day-to-day operational costs.
- Capital Expenditures (or Investment): Aimed at maintaining and improving the country's infrastructure.
- Transfer Costs: Almost half of public spending consists of cash transfers paid by the State to families and businesses, enabling them to have such income.