Answer to Question #175716 in Microeconomics for ivan

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

Solution:

A business tax is an amount levied on business income by the national government. Normally, the reduction of business taxes would lead to higher investment, faster productivity growth and prompt higher wages, and an increase in disposable income that would offer a high standard of living, including high spending. As a result, GDP will be boosted and will increase. On the other hand, when business taxes are increased, the disposable income will reduce, so they will start cutting on spending and saving and workers will work less due to low pay. Therefore, GDP for the country will be lowered or decreased.

A personal income refers to all income collectively received by all individuals or households in a nation. It includes salaries, wages, dividends investment, rental receipts, and profit-sharing from a business. Personal income has a large effect on consumer consumption since it drives spending and saving habits. A decrease in personal income due to things such as tax increases and recession in the economy, discourages individuals to work more, save and invest. Therefore, this will result in a decrease in GDP. On the other hand, when personal income increases due to tax cuts and a favorable economy, this will motivate individuals to work even more, save and invest. It will also encourage them to spend more on the economy. Therefore, this will increase the GDP in the country.

Transfer payments refer to payments made in which no goods or services are being exchanged. Transfer payments are usually made to individuals by the national or state government through numerous social programs. This includes payments such as welfare, financial aid, unemployment benefits, and social security. Most of these payments are considered a wealth redistribution from the well-compensated to the poorly compensated. They are made for both humanitarian reasons and other times to help stimulate the economy by putting more money into people’s hands.

Transfer payments when issued by the government stimulate consumer spending to individuals who receive them and therefore, increase GDP. On the other hand, lack of transfer payments will have no effect on GDP or will lower GDP.