Why is a company's purchase of raw material not treated as final expenditure in the expenditure method?
Answer and explanation
Correct answer: Raw material is used in production and its value is included in the final product's value.
Raw material is an intermediate input because the firm uses it to produce another good. Its value becomes part of the value and price of the finished final product. The final product is then counted when it is sold for final use or investment. Adding the raw-material purchase separately would count the same value once as an input and again in the final product, causing double counting. Thus only the appropriate final expenditure is recorded.
Frequently asked questions
What is the correct answer to this question?
Raw material is used in production and its value is included in the final product's value.
Why is this the correct answer?
Raw material is an intermediate input because the firm uses it to produce another good. Its value becomes part of the value and price of the finished final product. The final product is then counted when it is sold for final use or investment. Adding the raw-material purchase separately would count the same value once as an input and again in the final product, causing double counting. Thus only the appropriate final expenditure is recorded.
Which subject and chapter does this question cover?
This is a Class 12 Economics question. Chapter: National Income and Related Aggregates. Topic: Methods of calculating national income - Expenditure Method.
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