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 \(200. With the 10 percent sales tax, his total comes to \)220. How much of the \(220 paid by Ralph is 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

Option b: $200

Step-by-step solution

Income method for calculating GDP

The Income method adds the total income (private and government income) generated by the production and sale of final goods and services to calculate the GDP of the country.

It includes components like rent, wages, interest, profit, and proprietor’s income as private income and taxes on production and imports like sales tax, license fees, custom duties as government’s income.

Explanation for choosing option (b)

The total price that Ralph pays for the leaf blower is $220, out of which $200 goes to the seller as the private income and $20 goes to the government as government income. The extra $20 is the tax on production that is included in GDP estimation.

Hence, only $200 is generated as private income.