An economy has two firms. Firm A produces cotton worth Rs 100 without any inputs; it sells Rs 70 of it to firm B and the rest stays unsold. Firm B uses up the cotton it buys and produces cloth worth Rs 200; it sells cloth worth Rs 180 to households and the rest stays unsold. There is no government and no foreign trade. By the expenditure method, what is the GDP, and how much of it is investment?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → GDP Rs 230, of which investment Rs 50
Given:
Cotton produced by A = Rs 100
Cotton sold by A to B = Rs 70
Cotton left unsold with A = Rs 30
Cloth produced by B = Rs 200
Cloth sold by B to households = Rs 180
Cloth left unsold with B = Rs 20
By the expenditure method, GDP = C + I. Unsold output is a rise in inventories, and a change in inventories is investment.
C = 180
I = change in inventories = 30 + 20 = 50
GDP = 180 + 50 = Rs 230, of which investment Rs 50
The cotton bought by B is intermediate, so it is not final expenditure. Value added gives the same total: 100 + (200 − 70) = 230.
NCERT (2026-27): “2.2.1 The Product or Value Added Method … Inventories are treated as capital. Addition to the stock of capital of a firm is known as investment. Therefore, change in the inventory of a firm is treated as investment. …” “2.2.3 Income Method It is to be noted that in identity (2.6), I stands for sum total of both planned and unplanned investments undertaken by the firms. …” |