Chapter 21, Problem 1SPPA

To determine

Total income, net taxes and GDP.

Explanation of Solution

Figure 1 represents the circular flow of income in the economy. The information provided in the given case indicates that government expenditure in the economy, shown by 'U' in Figure 1, is $2 trillion. The variable 'W' that reflects consumption expenditure in the economy, is worth $7 trillion.

In the similar manner, the flow shown by variable 'J' is the investment expenditure and 'Z' shows the flow of net exports. These expenditures are equal to $1.5 trillion and $0 respectively.

In an economy, the total income is the factor income earned by the factors o9f production. Here, the factor market is paying an income shown by 'Q' in Figure 1. This value is not provided. Hence, use the national income identity that provides GDP by expenditure method.

Under expenditure method, GDP is computed as the sum of four expenditures:

Here 'C' is the consumption spending, 'I' is the investment spending, 'G' is the spending incurred by the government and 'NX' is the net exports. Data indicates that the value of 'C' is $7 trillion, and that of 'I' is $1.5 trillion. Net exports are worth $0 and 'G' is $2 trillion.

Use the expenditure method to find GDP as well as total income:

Total income as well as GDP is both worth. trillionNet taxes represent the amount of taxes paid by the household that are subjected to all the cash benefits received by them. In figure 1, this is represented by a flow of variable 'R'. Note that there is no value provide for net taxes. Hence, use the following expression for net taxes:

In this case, 'S' is the saving and is shown by 'V' in figure 1.

The value of 'V' is $1.5 trillion so that saving is $1.5 trillion. Given that 'C' is $7 trillion and 'Y' is found to be $10.5 trillion. Use these values to find net taxes:

Hence, net taxes are worth$2 trillion.

Economics Concept Introduction

Concept Introduction:

Circular flow of income is a tool that is used to represents the flow of real and monetary variables among various sectors in the economy. The nation has four major market participants in the form of firms, households, financial institutions and the government. The flow of goods and services is in the opposite direction to the flow of money.