Firm A uses no inputs and grows sugarcane worth Rs 120. It sells sugarcane worth Rs 90 to firm B, and the rest stays unsold with A. Firm B also uses imported chemicals worth Rs 10, and sells all its sugar to households for Rs 300. A pays wages of Rs 40. B pays wages of Rs 110 and rent of Rs 30. The rest of each firm’s value added is profit. What are the GDP and firm B’s profit?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs 320 and Rs 60
Given:
Sugarcane grown by A = Rs 120
Sugarcane sold to B = Rs 90
Imported chemicals used by B = Rs 10
Sugar sold by B to households = Rs 300
Wages paid by A = Rs 40
Wages paid by B = Rs 110
Rent paid by B = Rs 30
Value added = value of output − intermediate goods used. Unsold sugarcane is part of A’s output (a rise in inventory). Imported chemicals are an input for B. Profit is what is left of value added after wages and rent.
\( \displaystyle \text{Value added by A} = 120 - 0 = 120 \)
\( \displaystyle \text{Value added by B} = 300 - 90 - 10 = 200 \)
\( \displaystyle GDP = 120 + 200 = 320 \)
\( \displaystyle \text{Profit of B} = 200 - 110 - 30 = 60 \)
GDP is Rs 320 and B’s profit is Rs 60.
Option (2) Rs 300 and Rs 60 — counts only the final sales (300) and leaves out A’s unsold stock.
Option (3) Rs 330 and Rs 70 — leaves out the imported chemicals.
NCERT (2026-27): “2.2.1 The Product or Value Added Method … Taking cognizance of change of inventories we may write Gross value added of firm, i (GV Ai) ≡ Gross value of the output produced by the firm i (Qi) – Value of intermediate goods used by the firm (Zi) GV Ai ≡ Value of sales by the firm (Vi) + Value of change in inventories (Ai) – Value of intermediate goods used by the firm (Zi)” “… Equation (2.1) has been derived by using: Change in inventories of a firm during a year ≡ Production of the firm during the year – Sale of the firm during the year.” “2.2.3 Income Method As we mentioned in the beginning, the sum of final expenditures in the economy must be equal to the incomes received by all the factors of production taken together (final expenditure is the spending on final goods, it does not include spending on intermediate goods). This follows from the simple idea that the revenues earned by all the firms put together must be distributed among the factors of production as salaries, wages, profits, interest earnings and rents. …” |