Why does interfirm transactions not include while clculating national income?
Dear Student,
Inter-firm transactions involve sale and purchase of goods between firms. These transactions are not inculded in the national income of a country, since they form a part of intermediate consumption.
For instance, Consider a situation where there are three firms in a country, Firm A, Firm B and Firm C.
Firm A produces cotton at a cost of Rs.100 and sells it to Firm B for Rs 500. Thus, the value added by Firm A is Rs 400 (i.e. Rs 500 – Rs 100). Firm B purchases cotton for Rs 500, makes cotton yarn and sells it to Firm C for Rs 700. The value added by Firm B is Rs 200 (i.e. Rs 700 – Rs 500). Firm C uses the cotton yarn to make cloth and sells at Rs 900 to the final consumer. Therefore, the value added at this stage of production is Rs 200 (i.e. Rs 900 – Rs 700).
Thus, while calculating national income, we will only consider that net value added at each stage and not the total value of inter-firm transaction.
Thus, the gross value added by all the producing units is Rs 800.
in case of any doubts, do get back to us.
Inter-firm transactions involve sale and purchase of goods between firms. These transactions are not inculded in the national income of a country, since they form a part of intermediate consumption.
For instance, Consider a situation where there are three firms in a country, Firm A, Firm B and Firm C.
Firm A produces cotton at a cost of Rs.100 and sells it to Firm B for Rs 500. Thus, the value added by Firm A is Rs 400 (i.e. Rs 500 – Rs 100). Firm B purchases cotton for Rs 500, makes cotton yarn and sells it to Firm C for Rs 700. The value added by Firm B is Rs 200 (i.e. Rs 700 – Rs 500). Firm C uses the cotton yarn to make cloth and sells at Rs 900 to the final consumer. Therefore, the value added at this stage of production is Rs 200 (i.e. Rs 900 – Rs 700).
Thus, while calculating national income, we will only consider that net value added at each stage and not the total value of inter-firm transaction.
Thus, the gross value added by all the producing units is Rs 800.
in case of any doubts, do get back to us.