Answer to Question #172912 in Microeconomics for Julie

Question

In at least three well composed paragraphs, please describe the effect that changes in business taxes, personal income, and transfer payments have on a country’s gross domestic product (GDP).

Answer 1

Effect of change in Tax on GDP : If taxes are increased then people will feel as if their income has gone down and so they will start cutting on their spending, also on their saving and will also feel like working less (due to income effect) and when taxes decrease, their spending increases,are motivated to work more and save more (due to substitution effect).

Effect of change in personal income on GDP : As personal income increases, consumption will increase, as consumption has increased so companies will have to produce more and to do so they have to invest more, so investment will increase. People will pay more taxes so government income will increase which will result in more government spending and if personal income decrease then opposite will happen consumption, investment and government spending (assuming there are no relief packages or changes in fiscal policy) will decrease. So we can see change in personal income will have multi-fold effect on GDP

Effect of change in transfer payments on GDP : Transfer payments are not directly included in GDP but any change in transfer payment do have effect on GDP. As increase in transfer payment will increase spending i.e. the consumption which helps in boosting the economy at recession times.