Question

1. Would it be possible for an increase in taxation to decrease the gross domestic product measured in the U.S.? Why or why not?

2.   Adam's Ribs in downtown Chicago buys $10,000 worth of beef ribs, $25,000 worth of pork ribs, and $8,000 worth of napkins each month. Are these purchases included in the calculation of gross domestic product? Explain your answer.

Note :- Please avoid Plagiarism

Answer 1

Answer to Question 1 :

First we need to understand what is GDP. GDP or Gross Domestic Product is the total sum of all the values of all final goods and services produced inside the geographical boundary of the economy during a given period of time.

When Government increases taxes, the most noticeable effect is on the consumption of the households. The consumption expenditure by households depends upon the disposable income of the households. Disposable income is the income that is left after paying tax to the government, i.e. total income less taxes. If tax is increased, the disposable income decreases which would mean that purchasing power of the consumers will decrease. As disposable income decreases, clnsumers will consume lesser amounts of goods and services. This would mean that consumption goes down. As consumption expenditure declines, the demand for goods and services will decline. As demand decreases, so will the production. Since, GDP is calculated by production, the GDP will fall.

Hence, we can say that an increase in taxes leads to decline in the GDP.

NOTE : As per our guideline, in the case of multiple questions without specification as to which need to be answered, only the first is solved.