# Relationship between government spending and taxes on gdp deflator

### GDP Formula - How to Calculate GDP, Guide and Examples

August The Heterogeneous Effects of Government Spending: It's All About Taxes the European Economic Recovery Plan, proposed by the European Commission in , and its American counterpart .. affect multipliers because of a correlation with deficit financing. Quarterly measures for GDP, GDP deflator. of GDP on current and one lag of defense spending, or government .. gues ( Ramey (c)), there is little difference between the impulse response . ( deflated by the GDP deflator), tax is a measure of the tax rate, News is from Ramey. economic aggregates to changes in government purchases and taxes is thin. purchases by the GDP deflator, effectively assuming that productivity . wars and the low and reasonably stable ratio of defense spending to GDP in this period).

To make it more meaningful for year-to-year comparisons, it may be multiplied by the ratio between the value of money in the year the GDP was measured and the value of money in a base year. Suppose also that inflation had halved the value of its currency over that period. We would see that the country's GDP had realistically increased 50 percent over that period, not percent, as it might appear from the raw GDP data. Unlike consumer price indexwhich measures inflation or deflation in the price of household consumer goods, the GDP deflator measures changes in the prices of all domestically produced goods and services in an economy including investment goods and government services, as well as household consumption goods.

If a country's GDP doubled over a certain period, but its population tripled, the increase in GDP may not mean that the standard of living increased for the country's residents; the average person in the country is producing less than they were before.

Per-capita GDP is a measure to account for population growth. Cross-border comparison and purchasing power parity[ edit ] The level of GDP in countries may be compared by converting their value in national currency according to either the current currency exchange rate, or the purchasing power parity exchange rate. Current currency exchange rate is the exchange rate in the international foreign exchange market.

Income and expenditure views of GDP - GDP: Measuring national income - Macroeconomics - Khan Academy

Purchasing power parity exchange rate is the exchange rate based on the purchasing power parity PPP of a currency relative to a selected standard usually the United States dollar. Going from country to country, the distribution of prices within the basket will vary; typically, non-tradable purchases will consume a greater proportion of the basket's total cost in the higher GDP country, per the Balassa-Samuelson effect. The ranking of countries may differ significantly based on which method is used.

The current exchange rate method converts the value of goods and services using global currency exchange rates.

• What is Gross Domestic Product (GDP)?

The method can offer better indications of a country's international purchasing power. There is no meaningful 'local' price distinct from the international price for high technology goods. There is a clear pattern of the purchasing power parity method decreasing the disparity in GDP between high and low income GDP countries, as compared to the current exchange rate method.

This finding is called the Penn effect. Standard of living and GDP: Wealth distribution and externalities[ edit ] GDP per capita is often used as an indicator of living standards. It is measured frequently in that most countries provide information on GDP on a quarterly basis, allowing trends to be seen quickly.

### Gross domestic product - Wikipedia

It is measured widely in that some measure of GDP is available for almost every country in the world, allowing inter-country comparisons. It is measured consistently in that the technical definition of GDP is relatively consistent among countries. GDP does not include several factors that influence the standard of living. In particular, it fails to account for: Externalities — Economic growth may entail an increase in negative externalities that are not directly measured in GDP.

Non-monetary economy— GDP omits economies where no money comes into play at all, resulting in inaccurate or abnormally low GDP figures. For example, in countries with major business transactions occurring informally, portions of local economy are not easily registered.

Bartering may be more prominent than the use of money, even extending to services. For instance, although computers today are less expensive and more powerful than computers from the past, GDP treats them as the same products by only accounting for the monetary value. The introduction of new products is also difficult to measure accurately and is not reflected in GDP despite the fact that it may increase the standard of living.

For example, even the richest person in could not purchase standard products, such as antibiotics and cell phones, that an average consumer can buy today, since such modern conveniences did not exist then. Sustainability of growth— GDP is a measurement of economic historic activity and is not necessarily a projection. Wealth distribution — GDP does not account for variances in incomes of various demographic groups. See income inequality metrics for discussion of a variety of inequality-based economic measures.

I will include just one here. Suppose you are given the following consumption and investment functions, and that government spending, taxes, and net exports are all zero: A positive level of government spending e. Or if one is using the quickest way, shown above, to find equilibrium output, then all that changes is that we're adding a positive number, and not just zero, for G when we total up autonomous spending. When we add in government spending i.

Taxes T complicate things a bit further -- in particular, the consumption function will now be different because it will no longer be true that disposable income DI, or after-tax income equals GDP Q. In this simplified model, we typically assume that taxes are levied in one of two ways: Everyone pays the same dollar amount and it adds up to T. A lump-sum tax is not exactly fair should millionaires and paupers really pay the same dollar amount?

With less of their income available to spend or save, people will consume less, thus lowering aggregate demand and lowering GDP.

## GDP Formula

Realistically, if there is a marginal propensity to consume, there should be a marginal propensity to import, because some of our consumption spending is on imports. But we're keeping it simple for now.

Exports do not really depend on the level of U.