Question

Suppose that California imposes a sales tax of 10 percent on all goods and services. A Californian named Ralph then goes into a home improvement store in the state capital of Sacramento and buys a leaf blower that is priced at 200 dollars . With the 10 percent sales tax, his total comes to 220 dollars . How much of the 220 dollars paid by Ralph will be counted in the national income and product accounts as private income (employee compensation, rents, interest, proprietor's income, and corporate profits)? a. $$ 220\( b. $$ 200\) c. $$ 180$ d. None of the above.

Short answer

The correct amount is $200.

Step-by-step solution

Identify the Base Price and Tax

Ralph buys a leaf blower for a base price of $200. The sales tax imposed is 10%. Thus, the sales tax is calculated as 10% of $200, which equals $20.

Calculate the Total Amount Paid

The total amount Ralph pays is the sum of the base price and the sales tax. So, the total amount is $200 (base price) + $20 (tax) = $220.

Determine the Part of Payment Counted as Private Income

Private income includes the amount before tax. Since the transaction involves a base price of $200, only this amount contributes to employee compensation, rents, interest, proprietor's income, and corporate profits. The $20 tax does not count as private income as it goes to the government.

Key concepts

Understanding Sales Tax

Sales tax is a type of consumption tax imposed by the government on the sale of goods and services. In this scenario, California has implemented a 10% sales tax on all purchases. When Ralph buys a leaf blower priced at $200, he also pays an additional 10% as sales tax, which amounts to $20. Thus, the total he pays is $220. The $20 is not part of the cost of the product itself; it's a tax levied by the state government to generate revenue.
This tax amount does not go to the seller but directly to the government. Therefore, it does not contribute to the seller's income. It serves as a source of revenue that can be used for public services and state infrastructure investments. Knowing this distinction is important when considering how sales tax affects national income calculations.

Defining Private Income

Private income refers to the income received by private individuals and businesses from various sources. This includes employee compensation, rents, interest, proprietor's income, and corporate profits. It reflects income before personal taxes and excludes government taxes and revenue from indirect taxes like sales tax.
In the scenario presented, when Ralph pays $220 for the leaf blower, only the base price of $200 is considered private income. The additional $20 is for sales tax and does not contribute to private income as it is collected by the government. Understanding these distinctions helps in analyzing how individuals and businesses generate and receive income.

Economic Measurement and Its Uses

Economic measurement is about quantifying various aspects of a country's economy, helping policymakers understand economic conditions. It includes metrics like Gross Domestic Product (GDP), national income, and others.
National income, in particular, involves the total value of all goods and services produced by a country and is part of economic measurement. This measure allows for an assessment of economic health and growth over time. However, it does not include indirect taxes like sales tax, as they do not represent income for individuals or businesses. Instead, they are government revenues, lying outside the immediate economic interaction of the transaction in question.

Accounting in Economics

Accounting in economics involves tracking financial transactions and understanding how they impact an economy. It provides crucial insights that inform economic policies and decisions. It encompasses various forms, from managing individual business finances to large-scale national accounts.
In the context of economic accounting, understanding how taxes like sales tax are treated is vital. While business transactions create private income that fuels the economy, taxes are necessary for national accounting but are separated from income calculations. This ensures clarity in how income and taxes are recorded, aiding businesses, individuals, and governments in making informed economic decisions.