What are Government Purchases?

Government purchases are any type of purchase activity that takes place between a municipal, state, or national government entity. While the main focus of these types of purchases are to supply the government with goods and services needed for efficient operation, this approach can also be utilized to stimulate activity within a given sector of the economy. By doing so, the government is able to minimize the general damage that a decline in that particular industry would have on the general economy, often by preventing job losses in both the targeted industry and industries that are dependent on that target.

Using government purchases as an economic tool is a basic of Keynesian economics, in which the process of stimulating demand for certain products can aid in offsetting lower consumer demand and keep selected industries functioning at acceptable levels until that demand increases once again. Over the long term, this has the effect of slowing the progression of an economic downturn, which in turn makes the recovery period shorter and easier to manage.

The strategy of using government purchases to stabilize an economy also plays a role in what is known as Gibson’s Paradox. Noted by Keynes in the early years of the 20th century, this paradox holds that current levels of wholesale prices directly impact the rise and fall of interest rates. When a government steps in to purchase products as a means of dealing with a current economic downturn, those wholesale prices are affected by the rates extended for the government purchases. This allows the government to indirectly influence the current interest rates in whatever way is believed to be most beneficial for the general economy.

Government purchases can be something as simple as creating broad contracts that allow multiple agencies to obtain special prices for product like telecommunications services, or may relate to a specific project such as contracting with a road builder to pave a section of highway. Ideally, the purchase activity has the dual effect of positively influencing the economy and also providing the government with something that is needed. It is also possible for a government to purchase goods and stockpile them as a means of stimulating the economy, then sell them incrementally at a later date once the economy has stabilized. The exact strategies that may be employed with government purchases depends greatly on any laws that are used to set fiscal policy for the jurisdiction, the resources available to make the purchase, and the anticipated benefits that are to be derived from those purchases.