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 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.

For a hypothetical economy, assuming there are only two firms (X and Y) with equal values of Gross Value Added

Question 66 of 75

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 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.

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Part (a)Concept understanding — National Income Identity

The National Income Identity: Where Does a Country's Money Come From?

Imagine you're running a lemonade stand. Every rupee you earn comes from someone buying your lemonade. Now imagine the whole country as one giant lemonade stand — every rupee earned by anyone must come from someone else spending money. That simple idea is the heart of the National Income Identity.

The Everyday Intuition

Think of the economy as a circular flow. Households earn income by working for firms. Firms produce goods and services that households buy. What households spend becomes the income of firms, which then becomes wages, rent, and profit for households again. So:

Total spending in the economy = Total income earned in the economy

This isn't a theory — it's an accounting identity. It must be true because every rupee spent by one person is a rupee earned by someone else.

The Precise Meaning (NCERT Class 12, Macroeconomics, Chapter 2)

The National Income Identity breaks down total spending into four components. NCERT gives it as:

Y = C + I + G + (X - M)

Where:

$Y$ = National Income (GDP at market prices)
$C$ = Private Final Consumption Expenditure (what households spend on goods and services)
$I$ = Gross Investment Expenditure (spending on capital goods like machinery, buildings, and inventory changes)
$G$ = Government Final Consumption Expenditure (government spending on goods and services, not transfers)
$X$ = Exports of goods and services
$M$ = Imports of goods and services
$(X - M)$ = Net Exports (exports minus imports)

Why This Matters

This identity is the foundation of all macroeconomic analysis. Here's what it tells you:

1. It's a checklist for growth. If you want GDP ( $Y$ ) to rise, at least one of $C$ , $I$ , $G$ , or $(X-M)$ must increase. No other way exists.

2. It reveals trade-offs. If government spending ( $G$ ) rises but taxes don't, either consumption ( $C$ ) or investment ( $I$ ) must fall — unless net exports improve. This is the "crowding out" debate.

3. It explains recessions. During a downturn, consumption ( $C$ ) and investment ( $I$ ) typically fall. The identity shows why governments try to boost $G$ or encourage exports.

A Simple Diagram (Describe in Words) …

Part (b)Concept understanding — National Income Identity

The National Income Identity: Where Does a Country's Money Come From?

The Everyday Intuition

Total spending in the economy = Total income earned in the economy

This isn't a theory — it's an accounting identity. It must be true because every rupee spent by one person is a rupee earned by someone else.

The Precise Meaning (NCERT Class 12, Macroeconomics, Chapter 2)

The National Income Identity breaks down total spending into four components. NCERT gives it as:

Y = C + I + G + (X - M)

Where:

$Y$ = National Income (GDP at market prices)
$C$ = Private Final Consumption Expenditure (what households spend on goods and services)
$I$ = Gross Investment Expenditure (spending on capital goods like machinery, buildings, and inventory changes)
$G$ = Government Final Consumption Expenditure (government spending on goods and services, not transfers)
$X$ = Exports of goods and services
$M$ = Imports of goods and services
$(X - M)$ = Net Exports (exports minus imports)

Why This Matters

This identity is the foundation of all macroeconomic analysis. Here's what it tells you:

1. It's a checklist for growth. If you want GDP ( $Y$ ) to rise, at least one of $C$ , $I$ , $G$ , or $(X-M)$ must increase. No other way exists.

3. It explains recessions. During a downturn, consumption ( $C$ ) and investment ( $I$ ) typically fall. The identity shows why governments try to boost $G$ or encourage exports.

A Simple Diagram (Describe in Words) …

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Part (a): Using equal GVA, $\text{VO}_X = 750$ , so Domestic Sales of X = ₹600 crore and of Y = ₹700 crore.

Part (b): Pension, rent and interest are factor incomes; money from children abroad is a transfer income.

Part (a)

We are told both firms have equal Gross Value Added, and $\text{GVA} = \text{Value of Output} - \text{Intermediate Consumption}$ .

Step 1 — GVA of Firm Y. Y's intermediate consumption is its purchases from X (150):

\text{GVA}_Y = 700 - 150 = 550

Step 2 — GVA of Firm X. Given equal, $\text{GVA}_X = 550$ .

Step 3 — Value of Output of Firm X. X's intermediate consumption is its purchases from Y (200):

550 = \text{VO}_X - 200 \;\Rightarrow\; \text{VO}_X = 750

Step 4 — Domestic Sales. Value of Output is disposed of as domestic sales, exports and additions to stock:

\text{Value of Output} = \text{Domestic Sales} + \text{Exports} + \text{Change in Stock}

For X (exports 100, additions to stock 50):

\text{Domestic Sales}_X = 750 - 100 - 50 = 600

For Y (no exports or change in stock given): …

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Part (a)

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