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Ch 4 1

National income can be calculated through three methods: total value addition, total income generated, and total expenditure on final goods and services. The Value Added Method, which calculates the difference between output value and intermediate goods, is crucial for avoiding double counting in national income calculations. Key formulas and considerations for this method include Gross Value Added at Market Price, adjustments for depreciation, and distinguishing between final goods and intermediate goods.

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10 views2 pages

Ch 4 1

National income can be calculated through three methods: total value addition, total income generated, and total expenditure on final goods and services. The Value Added Method, which calculates the difference between output value and intermediate goods, is crucial for avoiding double counting in national income calculations. Key formulas and considerations for this method include Gross Value Added at Market Price, adjustments for depreciation, and distinguishing between final goods and intermediate goods.

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sshubhas127
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We take content rights seriously. If you suspect this is your content, claim it here.
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Method of Calculating National Income 9716365213

National income can be viewed from three different angles


1) Total sum of value addition
2) Total sum of income generated
3) Total sum of expenditure on final goods and services

Value Added Method (Product Method, Inventory Method, Commodity Service Method)
It is calculated as the difference between the value of output and the value of intermediate goods.
It is also known as Industrial origin method or Net Output Method

Value AddedValue Added


Gross Value added at Market Price
Gross Domestic Product at MP
Sum total of GVA at MP (Primary, Secondary, Tertiary)
GVA at MP
GDP at MP= Value of output – Intermediated consumption Value of Output = Sales
Value of Output = Sales + ∆ Stock
∆Stock = Closing Stock – Opening Stock

GDPMP = Gross value added by all producing enterprises within the domestic territory of a country during the period of
one years.
GDPMP – Depreciation = NDPMP
NDPMP – Net Indirect Tax = NDPFC
NDPFC + Net factor Income from abroad = NNPFC

Precaution Regarding Value Added Method

IncludedNot Included
1) Commission earned on sale and purchase 1) Sale and purchase of second-hand goods
2) Own account production of goods of the producing unit 2) Value of intermediate goods
3) Production for self-consumption 3) Service for self-consumption
4) Imputed rent on owner occupied house

Problem of double counting and the ways to avoid it


• Double counting means counting the value of the same product more than once.
• In the calculation of the national income, the value of the final goods and services produced by all the
production unit of a country during the year are counted.
• The value of intermediate goods is excluded. When we calculate the value of final goods, the value of
intermediate goods is included.
• Every producer considers his good as the final product irrespective of whether it will be used as an intermediate
good or a final good.
Two ways to Avoid it
a) Final Output Method
1) In this method, only the value of the final goods is included.
2) Final goods are the goods which are ready for direct consumption or use.
3) The value of the final output is calculated by subtracting the value of intermediate goods fromthe value of output.
b) Value Added Method
1) The total sum of the value added by each producing unit of the country should be taken into consideration while
calculating the national income.
2) Value added is the difference between the value of output and the value of intermediate consumption.

1
Some other formula help for Value added Method
Sales = Quantity * Price
Sales = Domestic Sales + Export
Domestic Sales = Sales to households + Sales to government + Sales to other firms + production for self-consumption

Intermediate consumption = Purchase of raw material


Intermediate Consumption = Purchase of Raw Material from Domestic Firm + Imports
Intermediate Consumption = Domestic Intermediate Consumption + Imports
Intermediate consumption = Domestic Intermediate cost + Imports

Gross Value added at MP = Sum of Gross value added by all three sectors of an economy.
GVA at MP = GVA (GDP) at MP of Primary Sector + GVA at MP of Secondary Sector + GVA at MP of Tertiary Sector
GVA at MP = Sales + Change in stock – Intermediate consumption

NNP at FC = NDP at FC + NFIA (Factor income from abroad – Factor income to abroad)
Flow Chart of Value-Added Method

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