Suppose, there are only three firms in a hypothetical economy, viz. A, B and C. During a given period of time, the following transactions were undertaken by them:
(I) Firm A sold goods worth ₹2,000 to Firm B and ₹1,200 to Firm C.
(II) Firm B sold goods worth ₹1,100 to Firm A and ₹3,500 to Firm C.
(III) Firm C sold to households for final consumption, goods worth ₹5,700.
Estimate the value of Gross Domestic Product at Factor Cost (GDP\(_{PC}\)), assuming the value of Net Indirect Taxes to be ₹240.
(I) Firm A sold goods worth ₹2,000 to Firm B and ₹1,200 to Firm C.
(II) Firm B sold goods worth ₹1,100 to Firm A and ₹3,500 to Firm C.
(III) Firm C sold to households for final consumption, goods worth ₹5,700.
Estimate the value of Gross Domestic Product at Factor Cost (GDP\(_{PC}\)), assuming the value of Net Indirect Taxes to be ₹240.
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Solution and Explanation
To calculate GDP at Factor Cost, we use the value-added approach. This involves summing the value added by each firm, where value added is the value of output minus the value of intermediate inputs. Then, we adjust for Net Indirect Taxes to obtain GDPFC.
Step-by-Step Calculation
Step 1: Calculate Value of Output for Each Firm
- Firm A: Sold ₹2,000 to Firm B + ₹1,200 to Firm C = ₹3,200
- Firm B: Sold ₹1,100 to Firm A + ₹3,500 to Firm C = ₹4,600
- Firm C: Sold ₹5,700 to households = ₹5,700
Step 2: Calculate Intermediate Inputs for Each Firm
- Firm A: Purchased ₹1,100 from Firm B
- Firm B: Purchased ₹2,000 from Firm A
- Firm C: Purchased ₹1,200 from Firm A + ₹3,500 from Firm B = ₹4,700
Step 3: Calculate Value Added by Each Firm
Value Added = Value of Output − Value of Intermediate Inputs
- Firm A: ₹3,200 − ₹1,100 = ₹2,100
- Firm B: ₹4,600 − ₹2,000 = ₹2,600
- Firm C: ₹5,700 − ₹4,700 = ₹1,000
Step 4: Calculate GDP at Market Price (GDPMP)
GDPMP = Sum of Value Added by all firms
= ₹2,100 (Firm A) + ₹2,600 (Firm B) + ₹1,000 (Firm C) = ₹5,700
Step 5: Calculate GDP at Factor Cost (GDPFC)
GDPFC = GDPMP − Net Indirect Taxes
= ₹5,700 − ₹240 = ₹5,460
Final Answer
The Gross Domestic Product at Factor Cost (GDPFC) is ₹5,460.
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