(A) For a hypothetical economy, assuming there are only two firms (X and Y) with equal values of Gross Value Added (GVA). On the basis of the following data, estimate the value of Domestic Sales of both the firms (X and Y) :

S. No. | Items | Amount (in `crore)`
`(i) Value of Output of firm Y | 700 (ii) Purchases by firm X from firm Y | 200 (iii) Exports by firm X | 100 (iv) Purchases by firm Y from firm X | 150 (v) Additions to Stock of firm X | 50 OR (B) Ms. Reeta D'Costa, retired from the post of Income Tax Commissioner in the year 2023. Apart from her pension, she also receives the following from various sources : Rental income from a flat she owns. Interest income from her fixed deposits. Money sent by her children settled abroad.`
`Identify and classify, her monthly incomes into` factor income' and `transfer income', with valid reasons.

Q: (A) For a hypothetical economy, assuming there are only two firms (X and Y) with equal values of Gross Value Added (GVA). On the basis of the following data, estimate the value of Domestic Sales of both the firms (X and Y) : S. No. | Items | Amount (in ` crore) (i) Value of Output of firm Y | 700 (ii) Purchases by firm X from firm Y | 200 (iii) Exports by firm X | 100 (iv) Purchases by firm Y from firm X | 150 (v) Additions to Stock of firm X | 50 OR (B) Ms. Reeta D'Costa, retired from the post of Income Tax Commissioner in the year 2023. Apart from her pension, she also receives the following from various sources : - Rental income from a flat she owns. - Interest income from her fixed deposits. - Money sent by her children settled abroad. Identify and classify, her monthly incomes into `factor income' and `transfer income', with valid reasons.

**(A) Domestic Sales of firm X = ₹600 crore; Domestic Sales of firm Y = ₹700 crore.** Since only two firms exist, each firm's only intermediate purchase is from the other firm: - Intermediate Consumption of Y = Purchases by Y from X = ₹150 crore - GVA of Y = Value of Output of Y − Intermediate Consumption of Y = $700 - 150$ = ₹550 crore - Since GVA of X = GVA of Y = ₹550 crore, and Intermediate Consumption of X = Purchases by X from Y = ₹200 crore - Value of Output of X = GVA of X + Intermediate Consumption of X = $550 + 200$ = ₹750 crore - Domestic Sales = Value of Output − Change in Stock − Exports - Domestic Sales of X = $750 - 50 - 100$ = **₹600 crore** - Domestic Sales of Y = $700 - 0 - 0$ = **₹700 crore** (no stock addition/exports given for Y) **(B) Classification of Ms. Reeta's income:** - **Pension** (from her past government service) — Factor income (a deferred wage for services already rendered while employed). - **Rental income** from the flat — Factor income (rent is a factor payment for the productive use of an owned asset). - **Interest income** from fixed deposits — Factor income (interest is a factor payment for the use of loanable capital). - **Money sent by her children abroad** — Transfer income (a unilateral remittance/gift; no current productive service is rendered in return).

National Income Accounting

Estimation of Domestic Sales via Value Added Method (OR) Classification of Factor and Transfer Income

Official Answer

(A) Domestic Sales of firm X = ₹600 crore; Domestic Sales of firm Y = ₹700 crore.

Since only two firms exist, each firm's only intermediate purchase is from the other firm:

Intermediate Consumption of Y = Purchases by Y from X = ₹150 crore
GVA of Y = Value of Output of Y − Intermediate Consumption of Y = $700 - 150$ = ₹550 crore
Since GVA of X = GVA of Y = ₹550 crore, and Intermediate Consumption of X = Purchases by X from Y = ₹200 crore
Value of Output of X = GVA of X + Intermediate Consumption of X = $550 + 200$ = ₹750 crore
Domestic Sales = Value of Output − Change in Stock − Exports
Domestic Sales of X = $750 - 50 - 100$ = ₹600 crore
Domestic Sales of Y = $700 - 0 - 0$ = ₹700 crore (no stock addition/exports given for Y)

(B) Classification of Ms. Reeta's income:

Pension (from her past government service) — Factor income (a deferred wage for services already rendered while employed).
Rental income from the flat — Factor income (rent is a factor payment for the productive use of an owned asset).
Interest income from fixed deposits — Factor income (interest is a factor payment for the use of loanable capital).
Money sent by her children abroad — Transfer income (a unilateral remittance/gift; no current productive service is rendered in return).

Gross Value Addedvalue added methodintermediate consumptiondomestic salesfactor incometransfer incomepensionrent

Marking Scheme

1Part A: 1 mark for correctly computing GVA of firm Y (₹550 crore).
2Part A: 1 mark for correctly computing Value of Output of firm X (₹750 crore) using equal-GVA condition.
3Part A: 1 mark for correctly computing Domestic Sales of firm X (₹600 crore) and firm Y (₹700 crore) using the Domestic Sales formula.
4Part B: 1 mark for rental and interest income correctly classified as factor income with reasons.
5Part B: 1 mark for pension classified as factor income (deferred wage) and remittance from children classified as transfer income, with reasons.

Hint

Use Value of Output = Sales + Change in Stock, and note only-two-firms means each firm's intermediate consumption equals its purchase from the other firm.

Quick Oral Answer

Using the equal-GVA condition, firm Y's GVA works out to ₹550 crore, which fixes firm X's output at ₹750 crore, giving domestic sales of ₹600 crore for X and ₹700 crore for Y; and among Ms. Reeta's receipts, rent, interest and pension are factor incomes while money from her children is a transfer income.

Analysis & Explanation

Part (A) tests the Value Added (Output) Method identity: Value of Output = Sales (Domestic + Exports) + Change in Stock, rearranged to Domestic Sales = Value of Output − Change in Stock − Exports. The key insight with 'only two firms' is that each firm's entire intermediate consumption comes from purchases made from the other firm — this lets GVA be computed for Y first (since its output is directly given), and the equality of GVA is then used to back out X's unknown output. A common trap is forgetting that 'additions to stock' must be subtracted (not added) when going from output to sales.

Part (B) hinges on the rent/interest vs transfer-income distinction: rent and interest are payments for a productive contribution (an asset and capital respectively) currently in use, so both are factor incomes. Pension paid for genuine past service to an employer is treated as a deferred wage (factor income), distinguishing it from a general old-age welfare pension (which would be a transfer payment since it is unconnected to any service rendered). Money from children is a pure gift with no economic return expected, making it a transfer income — similar to scholarships or donations.

Common Mistakes

1Adding, instead of subtracting, 'Additions to Stock' while converting Value of Output into Sales.
2Forgetting that with only two firms, Intermediate Consumption of one firm exactly equals its purchases from the other firm.
3Classifying rent or interest as transfer income by mistake, or classifying gifts from children as factor income.

Interesting Facts

The Value Added Method is one of the three methods (along with Income and Expenditure methods) used by India's National Statistical Office (NSO) to estimate GDP, and all three should theoretically give the same total.

'Addition to stock' (inventory investment) is treated as part of a firm's own investment expenditure and hence part of GDP, even though the goods remain unsold.

Remittances from Indians settled abroad to their families are one of India's largest sources of foreign exchange, but by definition they never enter India's domestic national income as production.

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Frequently Asked Questions

Why is pension treated as factor income here rather than transfer income?

Because it is a retirement pension linked to Ms. Reeta's past productive service as a government employee — a deferred form of wage/compensation. A general old-age welfare pension unconnected to any past employment would instead be a transfer payment.

What is the formula linking Value of Output and Domestic Sales?

Value of Output = Sales (Domestic Sales + Exports) + Change (Addition) in Stock, so Domestic Sales = Value of Output − Change in Stock − Exports.