An economy has only two firms, A and B. The following information is given. All purchases by one firm from the other are used up as raw materials.
| Items | Amount (in lacs) |
|---|---|
| 1. Exports by firm A | 20 |
| 2. Imports of raw materials by firm A | 50 |
| 3. Sales to households by firm A | 90 |
| 4. Sales to firm B by firm A | 40 |
| 5. Sales to firm A by firm B | 30 |
| 6. Sales to households by firm B | 60 |
Answer the question on the basis of the above information.
Firm A pays 45 lac as wages and 5 lac as interest, and pays no rent. What is the profit of firm A?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 20 lac
Given:
Exports by A = 20
Sales of A to households = 90
Sales of A to firm B = 40
Imported raw materials of A = 50
Raw materials of A from B = 30
Wages = 45
Interest = 5
No rent
A firm’s value added is paid out as wages, interest, rent and profits. So profit = value added − the other factor payments.
Value added of A = (20 + 90 + 40) − (50 + 30) = 150 − 80 = 70
Profit = 70 − 45 − 5 = 20 lac
NCERT (2026-27): “2.2.1 The Product or Value Added Method … The term that is used to denote the net contribution made by a firm is called its value added. We have seen that the raw materials that a firm buys from another firm which are completely used up in the process of production are called ‘intermediate goods’. Therefore the value added of a firm is, value of production of the firm – value of intermediate goods used by the firm. The value added of a firm is distributed among its four factors of production, namely, labour, capital, entrepreneurship and land. Therefore wages, interest, profits and rents paid out by the firm must add up to the value added of the firm. Value added is a flow variable.” |