We all know that the formula for GDP I'd given by

GDP = C + I + G + NX

I would like to know, whether I am right in deducing that when consumers and industry pay taxes, or when there are import and export taxes I suppose, these do not increase the value of C and I in the equation. Instead, these increase the value of G, provided that the money supplied in taxes to the government is spent.

Is this correct?



In this equation:

GDP = C + I + G + NX

Taxes come from a combination of C+I but are offset by an increase in G.

Any government taxation which is not spent is an investment, so remains part of I.

  • $\begingroup$ Why did you use the term offset. Are we talking about positive and negative quantities? I don't think so. I think just G increases, leaving C and I unchanged. Is it not so? $\endgroup$ – Joselin Jocklingson Jun 4 '19 at 10:29
  • $\begingroup$ I mean, the taxes are included as part of the G value, but not as part of C and I, correct? $\endgroup$ – Joselin Jocklingson Jun 4 '19 at 10:31
  • $\begingroup$ Taxes fund government spending and typically come at a cost to consumption. An expanded GDP equation would be: Y = C(Y - T) + I + G + NX $\endgroup$ – Jamzy Jun 4 '19 at 15:35
  • $\begingroup$ What are Y and T in your equation? $\endgroup$ – Joselin Jocklingson Jun 5 '19 at 16:32
  • $\begingroup$ Also, don't they come at the cost of I as well. Too many taxes mean companies move abroad where there are less taxes. $\endgroup$ – Joselin Jocklingson Jun 5 '19 at 16:33

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.