What is the difference between pump priming and compensatory spending with example?
Share
Please briefly explain why you feel this question should be reported.
Please briefly explain why you feel this answer should be reported.
Please briefly explain why you feel this user should be reported.
Pump-priming refers to that initial public expenditure which helps to initiate and revive economic activity in a depressed economy. The idea is to increase private investment through public expenditure. Pump priming is not intended to replace private investment. Its object is only to stimulate private investment, and not to supplement it.
Public spending or compensatory spending, on the other hand, refers to government expenditure which is undertaken with the idea of compensating the decline in private investment. Daring depression, private investment declines due to the low marginal efficiency of capital, whose automatic revival is not possible.
In this situation there is no alternative or the government but to resort to public investment to fill the gap in private investment. Thus, compensatory public spending must necessarily be on a very large scale and must be continued till private investment becomes normal.