Lesson Plan _401(2)
GOVERNMENT SPENDING: WHY DO WE
SPEND THE WAY WE DO?
The following link is to the student version of this lesson for students to follow online:
http://econedlink.org/547
LESSON DETAILS
Grades: 9-12
Author: Council for Economic Education Technology Staff
Posted: March 15, 2004
Updated: January 4, 2007
Students look at definitions for the three categories of federal spending and using
the internet locate examples of each. They then categorize a list of expenditures
as government purchases or transfer payments. Given federal budget data,
students analyze the pattern of change that has occurred over the last 40 years.
Working in groups, they use the internet to ascertain what events altered
government spending decisions.
KEY CONCEPTS
Interest
STUDENTS WILL

Differentiate among the three categories of government spending: purchases, transfer payments, and
interest payments.

List examples of government purchases and government transfer payments.

Identify some government programs that have grown significantly in recent years and some that have
declined in importance during that time.

Explain what caused these trends in government spending.
INTRODUCTION
Income after taxes is used for two purposes: spending and saving. Choosing between
consuming things today versus saving today in order to consume some things later through
savings reflects the economic problem of scarcity. As result, choices must be made. This
holds true not only for individuals but for the U.S. federal government, too.
Historically, the founders of our country favored a limited role for government and a strong
protections for individual freedom and by 1900, federal government spending amounted to
less than three percent of our economy's production of goods and services. The percent of government
spending relative to GDP increased during the 20th century reaching more than 45 percent during World War
II. Today federal spending equals about 20 percent of GDP.
This growth in government spending has been accompanied by a significant change in the types of programs
being funded. Only one-fourth of federal government spending is now used for the more traditional
government purchase programs such as defense, transportation, physical resources, commerce, and
international affairs. More than 60 percent is now used for transfer payments, including direct payments to
individuals, and grants to state and local governments. When the payment of interest on the national debt is
added to the amount spent on transfer payments, non-purchase spending equals three-fourths of total federal
government spending.
RESOURCES

Activity 1: This is a worksheet where students will review the definitions of government purchases,
government transfer payments, and government interest rates.
Activity 1

The Federal Budget 2004-2009: This site provides students with examples of different types of
expenditures.
www.infoplease.com/ipa/A0873746.html

Activity 2: In this activity students will identify each expenditure by clicking on either Purchase or
Transfer.
Activity 2: Interactive
Activity 2a: Printable

Activity 3: Provides information on types of U.S. Federal Government Spending from 1960-2005.
Activity 3: Worksheet
Activity 3a: Interactive

Activity 4: During this activity students will answer the questions for their time period in a group and
present their findings to the class.
Activity 4a: 1960-1975
Activity 4b: 1970-1975
Activity 4c: 1978-1988 Defense Spending
Activity 4d: 1978-1988 Transfer Payments
Activity 4e: 1988-2000 Defense Spending
Activity 4f: 1988-2000 Transfer Payments

Activity 5: This is a retrieval chart for students to record the findings from each group in activity 4.
Activity 5
PROCESS
Part I
1. Display a copy of Activity 1. Tell students to print a copy of Activity 1. Review the definitions of
government purchases, government transfer payments, and government interest rates.
2. Direct students to the Federal Budget 2004-2009 Here they can locate examples of the different types
of expenditures, which they will record on Activity 1. Review their answers.
3. Instruct students to complete Activity 2.They are to correctly identify each expenditure by clicking on
either Purchase or Transfer. If you want students to record their answers for class discussion, have
them print a copy of Activity 2a.
1) Early childhood education
a) Purchase [CORRECT]
b) Transfer
2) Food stamps
a) Purchase
b) Transfer [CORRECT]
3) Missile defense system
a) Purchase [CORRECT]
b) Transfer
4) Housing subsidies
a) Purchase
b) Transfer [CORRECT]
5) Space station
a) Purchase [CORRECT]
b) Transfer
6) Interstate highway system
a) Purchase [CORRECT]
b) Transfer
7) Medicare
a) Purchase
b) Transfer [CORRECT]
8) School technology equipment
a) Purchase [CORRECT]
b) Transfer
9) Air traffic control technology updates
a) Purchase [CORRECT]
b) Transfer
10) Aid to families with dependent children
a) Purchase
b) Transfer [CORRECT]
11) Federal Bureau of Investigation
a) Purchase [CORRECT]
b) Transfer
12) Medical research
a) Purchase [CORRECT]
b) Transfer
13) Repair and maintain national parks
a) Purchase [CORRECT]
b) Transfer
14) Unemployment compensation
a) Purchase
b) Transfer [CORRECT]
15) Social Security
a) Purchase
b) Transfer [CORRECT]
16) Foreign aid
a) Purchase [CORRECT]
b) Transfer
4. Instruct students to look at Activity 3.
1) Which category of federal government spending has grown the most in importance since 1960?
a) Transfer payments [CORRECT]
b) Purchases
2) Which category has declined the most?
a) Transfer payments
b) Purchases [CORRECT]
Part II
1. Divide the students into six groups. Assign each group one of the following time periods for activity 4:
o 1960-1975
o 1970-1975
o 1978-1988 (2 groups, one defense spending, one transfer payments)
o 1988-2000 (2 groups, one defense spending, one transfer payments)
2. Have students print a copy of Activity 4 for their assigned group. Explain that each group is to use the
websites listed and a copy of Activity 3 to answer the questions.
3. Have groups report their findings. Print a copy of Activity 5 for each student. Tell students to record
information from other groups
4. Ask students to analyze the information they have recorded on Activity 5. Ask them what factors have
caused the shift in priorities for government spending. Have them cite specific examples.
[Depending on what world events were occurring from the 15 year war in Vietnam to the Arab-Israeli
conflicts which impacted the oil supply to the fall of the Iron Curtain and the end of the Cold War,
defense spending has fluctuated but has generally declined. Transfer payments have increased from the
inception of the War on Poverty in the mid-60s. The development of Medicare, increased aging of the
population and several severe recessions continued to put upward pressure on the transfer payment
portions of the federal budget.]
CONCLUSION
Students will answer the following interactive questions below. They can then use the answers to have a in
class discussion.

1. What are the three categories of government spending?

2. Give an example of each type of spending.

3. What government programs have grown significantly in recent years? What ones have
declined in recent years?

4. What are the causes for changes in priorities in government spending over the last 40
years? Site examples for both purchases and transfers.
Discuss:
1. What are the three categories of government spending?
[The three categories of government spending are: government purchases,
transfer payments, and interest payments on debt.]
2. Give an example of each type of spending.
[An example of each type of spending is: Purchases-national parks,
interstates, space, etc., Transfers-food stamps, Medicare, Social Security, welfare, etc., Interest
payments- interest on the national debt.]
3. What government programs have grown significantly in recent years? What ones have declined in
recent years? [Over the past forty years, defense as a percentage of government spending has been
declining while transfer payments have steadily increased.]
4. What are the causes for changes in priorities in government spending over the last 40 years? Site
examples for both purchases and transfers. (Refer to Activity 5 and the discussion above for
answer.) [Defense spending may once again account for a larger portion of federal government
spending. The federal deficit may increase if there is not enough tax revenue to pay for new defense
technology. However, increased defense spending can create new jobs in areas where defense
contractors are located, and new jobs can generate new tax revenue. Another possible outcome is that
cuts would have to be made to transfers to maintain a balanced budget. Decreasing transfers is difficult
because many are needs based, funded automatically by law, and not dependent on legislation year to
year. The baby boomers will also be reaching retirement age and the Social Security system will have
even more demands placed on it. More people will become eligible for Medicare, and medical costs will
continue to rise as new technology comes into use. Some students may have other valid hypotheses.]
ASSESSMENT ACTIVITY
The President of the United States is suggesting increased spending for a missile
defense system. He is also proposing a major long- term tax cut. Predict some
possible outcomes for the federal budget categories and the relative importance
of each outcome during the next 10 years.
[Defense spending may once again account for a larger portion of federal
government spending than before. The federal deficit may increase if there is not enough revenue to pay for
the new defense technology, but new defense spending can also create new jobs in areas where defense
contractors are located, and new jobs would generate new tax revenue. The baby boomers will hit retirement
age and the social security system will have even more demands placed on it. More people will become
eligible for Medicare, and medical costs will continue to rise as new technology comes into use. Some students
may have other hypotheses that might be valid.]