Wednesday, January 16, 2008

Taxes and GDP

"We can calculate GDP by summing total wages, interests, rent and profits received by householders. Should we include taxes as well?" - Mandy

Yes- we should include all sources of income that are derived from the production of goods and services, and that includes income received by the Government. Normally we capture this by summing up gross, or before tax, sources of income when we calculate GDP.


Anonymous said...

Professor, I've got a question. When calculating GDP,we assume that household prroduction is not taken into account. The textbook gave the example of a person preparing his own family meals. But doesn't he have to buy ingredients from the market? Can't we just consider the raw material he bought from the market as a substitution of "final goods"? Isn't the market value of the ingredients bought be included when calculating GDP? Thank you.

James Yetman said...

Yes, the market value of the ingredients is included, but that is typically only a small portion of the total value of the meal. If you compare home-cooked meals with restaurant meals, the latter include the cost of labour to cook and serve the meal, wait on the customers, wash the dishes, and the rent of the restaurant- all excluded from GDP when you eat at home, even though someone still needs to wash the dishes!