Public Investment In The Economic Role Of Analysis

Public investment is an important instrument for the government to intervene in its economy. The economists hold different views on the economic role of public investment policy. The goal of this paper is to study the effect of public investment. To make a profound study, the paper combines the modern economic theory with public investment practice.The paper first presents different views on the public investment of Keynes and the neo-classical economists. They analysed the effect of public investment on demand side with multiplier model. It was difficult for them to tell which was more effective between public investment and other public expenditures. Keynes emphasized accumulation of capital and paid attention to public investment, while the neo-classical economists rejected it. Neither of them could provide reasonable basis for their views. This is due to the limitations of investment multiplier model and its extended pattern ?the fiscal policy multiplier model. The multiplier model discusses the role of fiscal policy only on demand side. Therefore, it is difficult to make a comparison and a selection between public investment and other public expenditures based on the multiplier model.Then the paper follows Keynes' thinking of the importance ofaccumulating capital, and makes a brief review over the development of the importance of investment and the composition of investment decided by economic growth theory. The paper studies the role of public investment in accumulating capital with modern economic analysis. By empirical study I infer that the relationship of public capital and private capital may be complementary and they are both important in accumulating capital. Public investment or private investment may play an important role in capital accumulation and economic growth in different periods of time.After determining which components of public expenditures are productive, I define public investment as follows: public expenditures in infrastructure, human capital and R&D. Then the paper analyzes the economic role of public investment both on demand side and supply side with AS-AD model. I mainly study the economic role of public investment in changing economic resource condition and increasing potential output. The paper concludes that public investment raises the level of output by leading both the aggregate demand curve and the aggregate supply curve to shift to the right. Public investment leads the aggregate supply curve to shift to the right gradually, so public investment often takes a long time before its effect on output growth can be registered. Public investment experience of China and major industrialized countries showed raising public investment would lead the aggregate demand curveto the left, while reducing public investment would lead the aggregate demand curve to the right. The effect on output growth of public investment will continue over a long period of time because public investment will lead the aggregate supply curve to shift to the right gradually. We must inspect public investment on a long-term basis. In China, the level of public investment in physical capital, human capital and R&D is much lower than that of other countries. The government must raise public investment , especially investment in education and R&D.