3/31/12

Calculating real GDP, total income, and net taxes plus savings

This is a question and answer post about the economics of GDP calculation based on the following question:

The values key macroeconomic variables for the U.S. economy in 2011 were: C = \$9,484, I = \$1,870, G = \$2,480, X = \$1,804 and M = 2,208. All figures are in billions of 2005 dollars.
Use the information above to find:
Real GDP
Total Income
NT + S (where NT stands for net taxes and S represents savings)

In order to do this problem we need to remember the GDP (gross domestic product) equation:

Y = C + I + G + NX
Where:
Y is GDP
C is consumption
I is investment
G is government spending
NX is net exports or exports minus imports (X – M)

We can use the information above to calculate real GDP (we know it is real GDP because it was given to us in 2005 dollars, which is apparently the base year for this amount).  So we add:

9,484+1,870+2,480+1,804-2,208 which gives us a real GDP equal to:
\$13,430 (in billions of 2005 dollars).

To get total income we have to know the relationship between GDP and income.  Since a relationship is not specified in the question, we can assume that total income is going to be equal to GDP.  If this is the case the answer to total income is going to be the same as the answer to real GDP.  The reason that total income can be the same as real GDP is because of how GDP is measured.  GDP is the value of every final good or service produced within a country during a specified time period.  Since all of these goods and services must be purchased, the money has to go somewhere and it generally goes to the owners of the factors of production.  This means that the owners of the capital, labor, land, and entrepreneurship get paid (have an income) the same amount as is recorded for GDP.

Finally we need to calculate the sum of NT and S or net taxes and savings.  To do this we need to remember that total economy wide savings is equal to private savings plus public savings.  Net taxes is calculated as the difference between taxes paid to the government minus transfers received from the government or (T-TR).  Since none of this information is available to us we have to do some guessing.

First, we need to assume that we have a closed economy with respect to savings and investment and this will make S = I or savings equal to investment.

Second, if we assume that the government is operating under a balanced budget, then net taxes are equal to government spending.  So NT = G.  we can now add G and I to get NT + S which will be:

1,870+2,480=4,350

Now it is possible that the assumptions above do not hold, but based on the question I cannot be sure.  Please leave a comment if you have more information or believe the assumptions I made are not accurate, thanks!

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