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We can illustrate why these three approaches are equivalent with the help of an example.
Imagine an economy with only two businesses, called Khanna Fruits and Sharma Juices. Khanna Fruits owns and operates orange groves. It sells some of its oranges directly to the public. Rest of these oranges are sold to Sharma Juices which is involved in the production and sale of orange juice. The following table shows the transactions of each business during a year.
Khanna Fruits | |
Wages paid to Khanna Fruits employees | Rs. 15,000 |
Taxes paid to government | 5,000 |
Revenue received from sale of oranges | 35,000 |
Oranges sold to public | 10,000 |
Oranges sold to Sharma Juices | 25,000 |
Sharma Juices | |
Wages paid to Sharma Juices employees | Rs. 10,000 |
Taxes paid to government | 2,000 |
Oranges purchased from Khanna Fruits | 25,000 |
Revenue received from sale of orange juice | 40,000 |