Total income, net taxes and
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
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.
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.
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Chapter 21 Solutions
Foundations of Economics (8th Edition)
- The following table shows data on personal consumption expenditures, gross private domestic investment, exports, imports, and government consumption expenditures and gross investment for the United States in 2007, as published by the Bureau of Economic Analysis. All figures are in billions of dollars. Fill in the missing cells in the following table to calculate GDP. Components Personal Consumption Expenditures (CC) $9,734.2 Gross Private Domestic Investment (II) $2,125.4 Exports (XX) $1,643 Imports (MM) $2,351 Net exports of goods and services (X−MX−M) Government Consumption Expenditures and Gross Investment (GG) $2,689.8 Gross domestic product (GDP) This method of calculating GDP, which involves summing the , is called the approach.arrow_forwardRefer to the following table when answering the following questions. Table 2.2: U.S. 2014-2015 Domestic Income ($ billions) Compensation of employees, paid Wages and salaries Supplements to wages and salaries Business taxes Business subsidies Net operating surplus Private enterprises Surplus of government enterprises Depreciation of fixed capital (Source: Bureau of Economic Analysis) $13,219 $17.651 $17.765 Consider Table 2.2. From this data, total GDP in 2014 was about $14.963 2014 $18.527 9,264 7,487 1,777 1,210 57 4,489 4,509 -20 2,745 2015 9,704 7,866 1,838 1,238 57 4,575 4,593 -19 2,831 billion.arrow_forward1arrow_forward
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