Net National Product at Factor Cost of a particular country in a year is Rs 1,900 crores. There are no interest payments made by the households to the firms/government, or by the firms/government to the households. The Personal Disposable Income of the households is Rs 1,200 crores. The personal income taxes paid by them is Rs 600 crores and the value of retained earnings of the firms and government is valued at Rs 200 crores. What is the value of transfer payments made by the government and firms to the households?
The value of transfer payments made by the government and firms to the households is Rs 100 crores.
Explanation
This question tests the relationship between National Income, Personal Income, and Personal Disposable Income. The key insight is that Personal Income is derived from National Income by deducting undistributed profits (retained earnings) and adding transfer payments. Since there are no interest payments in this scenario, those terms become zero. Personal Disposable Income is then Personal Income minus personal taxes.
Solution Steps
Step 1: Calculate Personal Income from Personal Disposable Income. PDI = Personal Income - Personal Income Taxes 1,200 = Personal Income - 600 Personal Income = Rs 1,800 crores
Step 2: Apply the formula for Personal Income from National Income. Personal Income = National Income - Retained Earnings + Transfer Payments (Interest payments are zero as given in the question)
Step 3: Substitute known values in the formula. 1,800 = 1,900 - 200 + Transfer Payments
Step 4: Solve for Transfer Payments. 1,800 = 1,700 + Transfer Payments Transfer Payments = Rs 100 crores