What is Crowding Out Effect in Macroeconomics? - YouTube

hi there! i'm david and today we're going  to talk about the crowding out effect.  

what is it and how does it affect  the economy well let's get started

so the crowding out effect is something in  essence that relates to public spending or  

government spending and its effects on the private  sector so for example if the government were to  

increase uh its spending here we'll just add a  little section it may come at the detriment of  

private sector investments so we just lost some of  our investments which means that we lost potential  

growth but there's some other negative effects  that can come about there are three main types  

of crowding out so there is economy such as  stimulus and increased taxes social welfare and  

infrastructure so one of the negative potential  effects of a stimulus package from a government  

could be an increase in percentage rates or  interest rates on loans which will affect the  

private sector in dramatic ways so i mentioned  that a company had borrowed one million dollars  

and it had a two percent interest rate which  comes out to 20 000 well if there was a stimulus  

package and the percentage or the interest  were to go up to 3 percent well you just added  

half of the original interest value so instead of  it being 20 000 it's going to end up being 30 000  

and now that the project may be under budget  or the cost may be excessive the company may  

decide to completely scrap the project altogether  and therefore production is lost that's just one  

example well what about if taxes were to go up  that means that a company is also going to lose  

money and they may have to scrap production and  that can affect demand as well so even though  

demand may go up for something production may  or supply may drop or supply may remain the same  

and demand goes down because more people are  paying more taxes and they have less money to  

spend consumer spending in this case we could  just blot out a bit of consumer spending here  

in the case of increased taxes alternatively when  it comes to something like the federal reserve  

they can take money out of the system and help  balance out the supply and demand aggregate issue  

however that's not always going to be a perfect  solution the second type here is social welfare  

if the government were to increase its spending  of course is going to also have to increase taxes  

for social welfare projects but that also means  that the amount of money that companies are going  

to be able to put out again because of increased  taxes is going to come out of investments so  

that'll be less money from corporations and  various organizations being delivered to  

charitable donations which could actually end up  being less overall if the private sector were to  

be allowed to function freely when it comes to  the last type here infrastructure perhaps the  

government is wanting to increase some spending  on infrastructure for example on something like  

the highways so if you remember the highway  system was a network that was built in the 1900s  

uh it was a pretty big project because it spanned  the entire nation much like the railroad system  

originally but far more in depth so it connected  places that had never been connected before  

and it had spanned the entire country creating  a logistics framework that allowed for a wide  

variety of goods and services to travel the nation  much more freely at a reduced cost what does that  

cost though well imagine that we have three types  of populations in the job market or that are you  

know unemployed employed in the private sector and  employed in the government sector a public sector  

well you can't just take from the unemployed  sector for a big infrastructure project  

which is also going to close at the private  sector because of the way that things work  

you're also going to be taking from the  private sector as well and these two groups  

will then be working for the public sector and  now we also face reduced production there's also  

something known as the crowding in effect which  is when a stimulus or other forms of government  

spending can actually increase demand and help the  economy out but it is a very specific situation  

in which that can occur crowding out is more  generally a frequent occurrence stimuli they  

can help and they can hurt it depends on the  circumstances and what's going on at that time  

so we didn't go into any charts or graphs because  it's not really necessary to understand the  

general theme but if you have any questions please  leave a comment below don't forget to like share  

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