Two firms are given below. Firm A uses no raw material, produces cotton and sells it all to firm B, which uses it up to make cloth sold to consumers.
| Firm A | Firm B | |
|---|---|---|
| Sales | 40 | 150 |
| Intermediate consumption | 0 | 40 |
What is the GDP of this economy by the expenditure method?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 150
Given:
Firm A: sales 40 (all to B), no raw material
Firm B: sales 150 to consumers, intermediate consumption 40
The expenditure method adds only final expenditure. Here that is the consumers’ spending on cloth.
GDP = final expenditure on cloth = 150
The cotton is bought by B as an input, so it is not final expenditure. Value added gives the same: 40 + (150 − 40) = 150.
Option (1) 190 — counts the cotton twice.
NCERT (2026-27): “2.2.3 Income Method 2. GDP in the phase of disposition or the expenditure method: Recall that GDP = Sum of final expenditure or expenditures on goods and services for end use. In the above case, final expenditure is expenditure by consumers on cloth. Therefore, GDP = 200.” |