Taxes.

In using the flow-of-product approach 10 compute GDP,we need not worry about how the government finances its spending. It does not matter whether the government pars for its goods and services by taxing, by printing money, or by borrowing. Wherever the dollars come from, the statistician computes the governmental component of’GDP as the actual cost to the government of the goods and services.

Or consider the sales tax and other indirect taxes that manufacturers and retailers have to pay on a loaf of bread (or on the wheat. flour, and dough stages). Suppose these indirect taxes total 10 cents per loaf, and suppose wages, profit. and other value-added items cost the bread industry 90 cents. What will the bread sell for in the product approach? For 90 cents? Surely not, The bread will sell for $1, equal to 90 cents of factor costs plus 10 cents of indirect taxes. Thus the cost approach to GDP includes both indirect and direct taxes as elements of the cost of producing final output.

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