Can a country raise more in revenue than its GDP?

Question:

Can a country raise more in revenue than its GDP?

GDP Accounting:

There are three approaches to measuring gross domestic product: income approach, expenditure approach and product approach. Absent measurement errors, all three approaches will lead to the same number.

Answer and Explanation:

Generally, revenue cannot exceed GDP.

Revenue is generally raised through taxation. There are different kinds of taxes, but we can think of one aggregate tax that is applied to all sources of income, in this case, total tax revenue is:

  • tax revenue = total income * tax rate

According to the GDP accounting identity, GDP is equal to total income, therefore, tax revenue is then given by:

  • tax revenue = GDP * tax rate

Since tax rate cannot exceed one, it follows that tax revenue must be smaller than GDP.


Learn more about this topic:

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Gross Domestic Product: Definition and Components

from Economics 102: Macroeconomics

Chapter 4 / Lesson 3
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