[benji25]

Originally Posted by licence2kill

What do you think a multiplier is? If the multipler is 5 then that was extremely efficient spending that made us all a lot richer.

I just don't understand what's confusing you...

Oh my god. I seriously learned this in econ 101.

GDP is the measure of activity in the economy. GDP in that example is $100 higher. This does not mean people are $100 "richer".

Government spends $20. Gives it all to you.
You like to spend money so you say screw it I am going to blow it all and you buy an xbox for $20.
Then that same $20 is spent by an employee who was paid by the best buy you bought it from and all $20 is spent on candy.

You are no richer. the other guy is no richer and GDP is from consumption is $40 + GDP from government spending is $20 so GDP is $60 with only $20 in the economy. Therefore you cannot tax $60.

[licence2kill]

but that guy is richer, and so is the other guy.

[benji25]

Originally Posted by licence2kill

but that guy is richer, and so is the other guy.

But the government and the best are is poorer by an equal amount. Either way this part is not important to the discussion.

Let us assume we have a simple economy consisting of the government, person A and person B. Government gives person A $1 to spur the economy. Person and and person B buy things from each other daily for a whole year. At the end of that year GDP is $366. $1 of consumption every day plus the $1 spending of the government. However at the end of the year there is only $1. You cannot get tax revenue of $365 when there is only $1 in the economy.

GDP is just a measure of the amount of spending, or ironically I think it is similar the the "V" in your quantity theory of money equation that you use. Not sure on that though.

[licence2kill]

Actually we're both wrong. The initial transfer payment isn't calculated in GDP. G isn't total government spending, just government spending on output.

[benji25]

Originally Posted by licence2kill

Actually we're both wrong. The initial transfer payment isn't calculated in GDP. G isn't total government spending, just government spending on output.

True. I was just using it as an example to get money into the economy. My mistake.

Either way, once that money is in the economy it gets spent millions of times over which increases GDP while the money supply stays equal. Which leads to GDP far exceeding any possible tax revenue.