A country's economic analysts determine that the total cost of a representative basket of consumer goods was $500 in the designated base year. In the following year, the total cost for the exact same basket of goods fell to $450. Based on this data, the price index for the following year would be greater than 100.
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In an economy, the total output produced per worker is divided among firms (as profits), workers (as wages), and the government (as tax revenue). If the government increases the direct tax rate on income, holding all other factors constant, what is the immediate impact on the portion of total output available to be shared between firms and workers?
In an economy where the government imposes both direct and consumption taxes, a firm's total profit, expressed as a fraction of the total output per worker, is equal to the firm's designated profit share (σ).
Calculating Government Tax Revenue from Output
A country's economic analysts determine that the total cost of a representative basket of consumer goods was $500 in the designated base year. In the following year, the total cost for the exact same basket of goods fell to $450. Based on this data, the price index for the following year would be greater than 100.