Crowding out? (1 Viewer)

[BunJai]

Can someone explain to me what does crowding out effect means?

thanks

 

[feng]

basically when the government borrows to fund a deficit, effectively crowding out the private sector from borrowing...hence crowding out...

thus the private sector goes to overseas to borrow $$

 

[Bambul]

Actually it's a bit different, though you've got the right idea.

Crowding out assumes a closed economy (as such it really no longer applies today, but you still need to learn it).

It states that since there is a fixed amount of savings available to fund investment, an increase in government spending to boost economic growth would need to use up some of these savings. As the federal government is the safest organisation to invest with, all other firms must offer a premium on the interest rates offered by the government in order to get the funds they need. This increase in interest rates reduces private business investment and it is said that the government has "crowded out" the private sector.

 

[feng]

hmmmmm bambul from jamesruse? well 2001 anyway?

 

[Bambul]

Who else could it be? I don't know any other Bambul's.

 

[marsenal]

What about crowing in. How exactly does that work, because I noticed they mentioned this in the examiners response to one of the 2002 questions.

 

[truly-in-bliss]

Originally posted by Bambul
Crowding out assumes a closed economy (as such it really no longer applies today, but you still need to learn it).

ic what your argument is....ie: because we have easy access to the world's savings and therefore we can easily borrow money from the overseas financial markets. Therefore, deficit budgets dont have drastic negative impact on private borrowers.

But looking at it practicially, most households will not borrow from the overseas financial market, ie: most likely your mum and dad will be borrowing from the domestic banks.

 

[truly-in-bliss]

Crowding out is sorta the opposite of crowding out...

basically when the governemnt have lower budget deficit, this mans that there is less competition of private funds (ie: money from the private sector), interest rates are more likely to fall. With lower interst rates, this will stimulate private consumpation and expenditure.

Although i am expecting Bambul to add to this....

 

[Bambul]

Originally posted by truly-in-bliss
ic what your argument is....ie: because we have easy access to the world's savings and therefore we can easily borrow money from the overseas financial markets. Therefore, deficit budgets dont have drastic negative impact on private borrowers.

But looking at it practicially, most households will not borrow from the overseas financial market, ie: most likely your mum and dad will be borrowing from the domestic banks.

They borrow from the bank: yes. But those banks then subsequently borrow from the money markets if they need to make up a shortfall (ie. if S<I). And these money markets are linked between countries, so that a surplus in one country goes to a shortfall in another.

That is for Australia. For the US Budget however, since it is so bloody huge (I think about 5% of world GDP), that a deficit there will have a crowding out effect. But Australia is so small that it's budget deficit can be ignored.