In a day, a tailor collects Rs 800 from stitching clothes and uses no intermediate goods. Over the day his machine depreciates by Rs 60. He pays sales tax of Rs 40, takes home Rs 400 and keeps Rs 300 in his business to buy a new machine. He pays Rs 30 as income tax out of the amount he takes home. What is his contribution to NNP at factor cost and to Personal Disposable Income?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → NNP at factor cost Rs 700; PDI Rs 370
Given:
Receipts = Rs 800
No intermediate goods
Depreciation = Rs 60
Sales tax = Rs 40
Taken home = Rs 400
Kept in the business = Rs 300
Income tax = Rs 30
Go down the chain one step at a time. The Rs 300 kept in the business is undistributed profit: it does not reach the household.
NNP at market prices = 800 − 60 = 740
NNP at factor cost = 740 − 40 = Rs 700
Personal income = 700 − 300 = 400
PDI = 400 − 30 = Rs 370
Rs 740 forgets the sales tax.
Rs 400 is personal income, before income tax.
NCERT (2026-27): “2.3 Some Macroeconomic Identities It is to be noted that all these variables are evaluated at market prices. Through the expression given above, we get the value of NNP evaluated at market prices. But market price includes indirect taxes. When indirect taxes are imposed on goods and services, their prices go up. Indirect taxes accrue to the government. We have to deduct them from NNP evaluated at market prices in order to calculate that part of NNP which actually accrues to the factors of production. Similarly, there may be subsidies granted by the government on the prices of some commodities (in India petrol is heavily taxed by the government, whereas cooking gas is subsidised). So we need to add subsidies to the NNP evaluated at market prices. The measure that we obtain by doing so is called Net National Product at factor cost or National Income. Thus, NNP at factor cost ≡ National Income (NI ) ≡ NNP at market prices – (Indirect taxes – Subsidies) ≡ NNP at market prices – Net indirect taxes (Net indirect taxes ≡ Indirect taxes – Subsidies)” “2.3 Some Macroeconomic Identities … First, let us note that out of NI, which is earned by the firms and government enterprises, a part of profit is not distributed among the factors of production. This is called Undistributed Profits (UP). We have to deduct UP from NI to arrive at PI, since UP does not accrue to the households. …” “2.3 Some Macroeconomic Identities … If we deduct the Personal Tax Payments (income tax, for example) and Non-tax Payments (such as fines) from PI, we obtain what is known as the Personal Disposable Income. Thus Personal Disposable Income (PDI ) ≡ PI – Personal tax payments – Non-tax payments. …” |