Question

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.

Hint:

When calculating GDP at Factor Cost, always remember to add Net Indirect Taxes, which include taxes less subsidies on production.

Answer 1

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 GDP_FC.

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 (GDP_MP)

GDP_MP = 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 (GDP_FC)

GDP_FC = GDP_MP − Net Indirect Taxes

= ₹5,700 − ₹240 = ₹5,460

Final Answer

The Gross Domestic Product at Factor Cost (GDP_FC) is ₹5,460.