Economic Growth Model

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In view of the foregoing, there are two basic growth model that has been generally recognized with respect to fiscal policy. Neoclassical growth models with respect to Fiscal Policy imply that government policy can affect only the output level but not the growth rate. However, endogenous growth models incorporate channels through which fiscal policy can affect long-run growth (Barro-Sala-i-Martin, 1991). The later models classify generally the fiscal policy instruments into: (i) distortionary taxation, which weakens the incentives' to invest in physical/human capital, hence reducing growth; (ii) non-distortionary taxation which does not affect the above incentives, therefore, growth due to the nature of the utility function assumed for the…show more content…
Economic growth is measured by the increase in the amount of goods and services produced in a country over a given period (Zhattau, S. 2013).In its wider aspect, economic growth implies raising the standard of living of the people and reducing inequality of income distribution (Jhingan, 2003).Whatever the prevailing political or economic ideology of the less developed country, its economic and social progress depends largely on its government’s ability to generate sufficient revenues to finance an expanding program of essential, non-revenue-yielding public services, health, education, transportation, legal and other institutions, poverty alleviation, and other components of the economy and social infrastructure, Torado and smith (2009). 2.2 The Pillars of Fiscal Policy According to Tanzi and Zee (1997) there are three cardinal indicators of fiscal policy - government expenditure, taxes and deficits. For the purpose of this research work we would limit our consideration to the roles played by Oil revenue, Non-oil revenue and Government expenditure exemplified by its recurrent and capital components in determining economic growth.Musgrave and Musgrave (2004) noted the evidence that the role of fiscal system plays a multi-fold role in the process of economic growth. These roles include the notion that: 1. The level of taxation affects the level of public…show more content…
In addition, government tries to smooth out the ups and downs of the business cycles, in order to avoid either large-scale unemployment at the bottom of the cycle or raging price inflation at the top of the cycle. More recently, government has become concerned with financing economic policies which boost long-term economic growth (Zhattau, S. 2013).Therefore, fiscal policy is considered an important variable which may determine changes in national income in developing countries like Nigeria. In order to stimulate the economic growth by means of fiscal policy, the country has more instruments: (a) the financing of direct investments which the private sector would not provide an adequate quantities; (b) the efficient supply of certain public services which are necessary to ensure the basic conditions to display the economic activity and long term investments; (c) the financing of public activities so as to minimize the distortions to come up with the decisions to spend and invest proper in the private sector (Brasoveanu and Brasoveanu, 2008; Ito, Watanbe and Yabu, 2007; Talvi and Vegh, 2005).On the other hand, it maintained that,Fiscal policy could also be used to reduce the excess demand which resulted in inflation through increase in taxes and reduction in public

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