Question

Tom and Mary both work and Tom’s Mom Beth watches their daughter during the day for free. Assume that Congress passes a very generous child care tax credit: 50% of expenses up to $6000 in expenses. Following the passage of the expanded tax credit, Tom and Mary decide to pay Beth $6,000 a year to watch their child. How has GDP been affected by this policy change?

Answer 1

GDP indicates how much an economy produce in a year. It is market value of all goods and services produced within the domestic territory of a country during an accounting year. The GDP can be calculated in three method namely 1) Product Method, 2) Income Method and 3) Expenditure Method.

Under the product method, GDP is measured in terms of value added by each producing enterprise in an economy during an accounting year. This method is otherwise known as Value Added Method or Net Output Method.

Under Income method GDP is measured in terms of factor payments such as compensation of employees, rent, interest and profits. Thus the income method calculates the GDP in terms of the sum total of factor income earned by the residents of a country during an accounting year.

Expenditure methods calculate GDP in terms of the expenditure on the purchase of final goods and services produced in the economy during an accounting year.

Before the tax credit, the services of Beth were non-monetized. But after the tax credit the service of Beth is rewarded. This increase the amount of factor income of the economy. Hence the GDP of the economy will increase.