IAI May 13 Q33

[dextar]

I'm anyways bamboozled by the terms used in this question which I coudn't locate anywhre in text. Can anyone please throw light
Suppose the government's national income and product accounts revealed the following information (in Billion units)
Rents 26
Personal saving 4
Corporate income taxes 28
Net exports -15
Undistributed corporate profits 17
Dividends 30
Net foreign factor income 12
Transfer payments 33
Consumption of fixed capital (depreciation) 31
Social Security contributions 39
Compensation of employees 462
Taxes on production and imports 22
Corporate profits 75
Personal taxes 71
Interest 29
Proprietors' income 59
Personal consumption expenditures 525
Gross private domestic investment 110
Government purchases 72
a) Using the data in the table, verify that the income approach and the expenditure approach yield the same measure of GDP.
b) Find NDP by making the appropriate adjustment to GDP.
c) Verify that National Income can be found either by making the appropriate adjustments to NDP or by adding up the appropriate components of income and taxes.
d) Find PI, personal income, by making the appropriate adjustments to NI.
e) Make the appropriate adjustment to PI to find DI, disposable income

The Income method in the text says that income= "Add up the incomes earned before taxes, ie wages, interest, rent and profit .Do not include transfer payments"
I think this statement means w.r.t income statement add up all the pre tax expenses where income statement is
REvenue
-COGS
-WAges
-Rents
-Interests
=Profit before taxes
-taxes
=Profit After tax
Am I correct? Then why should we make use of Properitor's income here in calculting GDP using income method.
Also I coudn't get these terms, NDP and NI

 

[Margaret Wood]

I am happy with the expenditure approach but not with the income method.

For the expenditure method, we add up all the expenditure on goods and services that have been produced this year, ie C+I+G+X-M.

If we add all these up at market prices, this gives us GDP at market prices. Assuming that the figures given are at market prices, GDP at mp = 525+110+72-15=692.

(To get to GDP at factor cost (basic prices) we would deduct taxes on goods and add on subsidies but this isn't given so we have to keep working in market prices.)

To get to NetDP at mp we deduct depreciation, ie 692-31=661.

To get to NNationalP at mp we add on net income from abroad, ie 661+12 = 673.

Personal income is not in the course.

To get to household disposable income, we deduct all taxes paid by firms, all taxes paid by households and undistributed profit, and add on any subsidies received by firms and any benefits received by households, ie 673-28-22-71-39-17+33=529.

For the income method, we add up all the incomes that have been earned by factors of production for this year's production, ie we add up the four factor incomes of wages, interest, rent and profit. This would give us GDP at factor cost (basic prices). We would then need to add on taxes on goods and deduct subsidies to get to GDP at market prices.

The names given to some of these terms are a bit different, eg wages = compensation of employees. Notice that we have corporate profit and then undistributed profit - we want total profit so we use the first figure. Notice that we have proprietors' income - this is income from small businesses that might be a bit of wages and a bit of profit so it has its own name (it's sometimes called "mixed income").

So, I would say that GDP at factor cost is 462+29+26+75+59=651.

However, we are not given taxes on goods or subsidies on goods so we can't get from this to GDP at market prices. (By my calculations, net taxes on goods would be 41!)


(You seem to be thinking of a company's income (profit) statement, rather than the income of the whole nation - perhaps you're getting muddled with CT2!)

 

[dextar]

Thanks mam
Yes, I got confused with income statement of CT2!!
I think the definitions of these terms are the same given in Mankiw (Principle of economics).