Question

I'm working on a GDP problem. I'm not sure how to classify the components to consumption, Govt expenditure, Investment and Export spending. I'm listing the components here. Please help me in classifying 1.personal income taxes 2. government purchases 3. Inventory 1/1/2012 4. Inventory 12/31/2012 5. Medicare payments 6. Tariff on imports 7. Indirect business taxes 8. wages n salary 9. govt interest payments 10. Corporate taxes 11. Electricity production 12. New software.

Answer 1

personal income tax does not classify into any of these as it is a tax. We can go into where this shows up if you want but it doesnt fall under the class C+I+G+NX directly. 2. Gov purchases will fall under Gov expenditures (its money spent by gov). 3 and 4. I think there may be some missing context. Regardless inventories count under the Investment component of GDP! If it was asking for 2012 then 12/31/2012 inventory is what we would count in GDP. 3 would have been counted in 2011 GDP so we don't want to include that. 5. Medicare payments are what are referred to as a "transfer payment" and don't get counted in GDP. Again this is something we can talk about more if you would like. 6 Tariff are simply taxes on imports, and we don't include taxes! 7. Taxes, same as before 8. Wages and salary are not included in the expenditure approach of GDP (which is what we are doing here!), we exclude them because they will eventually show up in consumption as people spend money. 9. Gov interest payments are not included 10. Taxes same as before 11. electricity production itself is not a dollar figure! I am assuming your teacher meant money spent on electricity in which case it would show up as investment. 12. new software development would count under investment!

let me know if you need any clarification @dineshumass

Answer 2

Thanks a lot for your reply!!!!!!