Chapter 8: Q. 7 (page 186)

Consider the following hypothetical data for the U.S. economy in $2020$ (in trillions of dollars), and assume that there are no statistical discrepancies, zero net incomes earned abroad, and zero taxes on production and imports of net subsidies.
a. What is gross domestic income? GDP?
b. What is gross private domestic investment?
c. What is personal income?

Short Answer

Expert verified

Option a

As a result, the US economy's GDP is $14.6$ trillion dollars.

Option b

As a result, the US economy's GPDI is $14.6$ trillion dollars.

Option c

i. As a result, the personal income is $10.8$ trillion dollars.

ii. As a result, personal discretionary income amounts to $9.1$ trillion dollars.

Step by step solution

Introduction

One of the most important factors in determining a country's development and success is its gross domestic product, or GDP.
It displays the total value of the country's finished goods or the amount of output produced.

Option aDomestic income and GDP

The Gross Domestic Product (GDP) is typically computed using two methods: spending and income.

a) Wages, rent, interest, profits, indirect business taxes, and depreciation will be included to the GDP calculation using the income approach.

The following is the calculating formula :

$G D P = w a g e s + i n t e r e s t + r e n t + p r o f i t + I n d i r e c t t a x e s + d e p r e c i a t i o n = 8.2 + 0.8 + 0.7 + 2.8 + 0.8 + 1.3 = 12.5 + 2.1 = 14.6$

As a result, the US economy's GDP is localid="1651724119598" $14.6$ trillion dollars.

Option bPrivate domestic investment

The phrase "gross private domestic investment" (GPDI) refers to the manufacturing of capital goods such as industrial equipment and machinery that will aid future output and consumption.

Net exports, government expenditure, and personal consumption are subtracted from gross domestic product to arrive at gross private domestic investments. The following is the formula for calculating it:

$G P D I = G D P - N e t e x p o r t s - G o v e r n m e n t s p e n d i n g - c o n s u m p t i o n = 14.6 - (1.5 - 1.7) - 3.8 - 12.0 = 14.6 + 0.2 - 3.8 - 12 = - 1.6$

As a result, the US economy's GPDI is $14.6$ trillion dollars.

Option ci. Personal income

The total amount of money made by households in the economy before paying income tax rates is referred to as personal income. To compute net domestic product, or national income, depreciation is removed from GDP, which is then used to calculate personal income. Subtract Nl from corporate taxes and social security contributions to arrive at personal income.

Personal income, or PI, is calculated as follows:

$p e r s o n a l i n c o m e = G D P - d e p r i c i a t i o n = N D P - c o r p o r a t e t a x - s o c i a l s e c u r i t y c o n t r i b u t i o n$

$P I = 14.6 - 1.3 = 13.3$

$N a t i o n a l i n c o m e = 13.3 - 0.5 - 2 = 10.8$

As a result, the personal income is localid="1651722808966" $1 0 . 8$ trillion dollars.

Step 5: ii. Personal disposable income

Personal disposable income is calculated by subtracting personal income tax from personal income. The calculation yielded the following result:

$P e r s o n a l d i s p o s a b l e i n c o m e = P e r s o n a l i n c o m e - p e r s o n a l i n c o m e t a x = 10.8 - 1.7 = 9.1$

As a result, personal discretionary income amounts to $9.1$ trillion dollars.

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