The purpose of this dissertation si to appraise the role of public sector and to analyze empirically the effects of government expenditure on economic growth from 1970 to 1997 in Malaysia. The effects of government expenditure on economic growth have been extensively considered in the macroeconomic literature. Recently, some macroeconomists have reconsidered the impact which the government expenditures and tax decisions may have on macroeconomic variables. The government activities turn out to have effects on long-run growth rates because we are considering models that generate endogeneous growth. In this model, changes in government activities would amount to shifts in the production function. To analyze the implications of this theoretical model, I made an empirical study, using by OLS estimation and Impulse response function method. The main empirical results based on the analysis of annual data of 5 components of Korean real GDP - government investment, private consumption, private investment, net export-can be summarized as follows: 1) There exists a significant positive relationship between government investment, spending and private activities. (i.e. private investment, private consumption, realGDP) which is consistent with the theoretical results. 2) The response of private investment and GDP to the change in govemment consumption expenditures is statistically insignificant, but increasing government consumption expenditure partially crowd out private consumption. 3) The reaponse of private consumption, private investment and GDP to the change in total government spending is statistically insignificant. probably because the largeshare of consumption components in total government spending has a dominant effect on private spending. The above empirical results confirm the hypotheses of the theoretical model, and the results suggest that a model treating government expenditures as a singleexpenditure component is not adequate. To capture the effect of some government expenditures on real output, it seems more appropriate to treat this kind of purchase as public capital that increases the marginal product of the private production process, as considered externalities between public capital and private capital.