ACCOUNTING SYSTEM-EXAMPLE

Let us now introduce a complication. There are three firms in the production sector. The Fruit Extracts Company manufactures from raw fruit, fruit extracts with the help of labor. All of this is sold to Jam Co., which processes it and converts it into jam. The jam is sold in bulk to Bottling and Distribution Co., which sells it to the households. As before the firms are owned by some of the households labor is also supplied by households. One year's accounts are as follows: 

                                                  Fruit Extracts Co. 

                                                 Jam Co. 

                                      Bottling and Distribution Co. 

For this economy, the market value of outputs now is Rs.120 worth of extracts, Rs.220 worth of bulk jam and Rs.300 worth of bottled jam, a total of Rs.640. The value of all factor payments is Rs.300 consisting of Rs.230 of wages and salaries and Rs.70 of profits. Should we still define GNP as market value of all outputs? Obviously not, because we would be double counting. The value of bottled jam already contains in it the value of bulk jam which in turn contains in it the value of extracts. From the total value of all outputs we should net out the value of all intermediate inputs, i.e. those goods which are used up as inputs in the production of other goods. Thus GNP is the market value of outputs of final goods and services - those which are not further processed into some other goods but are directly consumed. In this case only bottled jam is the final good. Therefore GNP is Rs.300 which equals GNI as it should since all purchases of bottled jam are financed out of incomes earned.