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Measurement of

National Income

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(Value Added Method)

ANKIT KUMAR

PGT, ECONOMICS

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  • Value added method measures national income in terms of value addition by each producing unit in the economy during the period of one year.

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  • It is also known as product method.

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Concept of Value Added

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Value added refers to the addition of value to the raw material by a firm, by virtue of its productive activities.

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Value Added = Value of output – Intermediate consumption

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Example of Concept of Value Added

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Suppose a baker needs only flour to produce bread. He purchases flour as input worth ₹500 from the miller and then by virtue of its productive activities, converts into bread and sells the bread for ₹700.

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In the given example:

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  • Flour is an input and its value is termed as value of intermediate consumption.
  • Bread is the output and its value is termed as value of output.
  • Difference between the value of output and intermediate consumption is termed as Value Added.

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Value of Output

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Value of output refers to market value of all final goods and services producing during a period of one year.

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Value of Output = Price X Quantity

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Measurement of Value of Output

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  1. When entire output is sold in an accounting year, then

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2. When the entire output is not sold in an accounting year, then the unsold stock is added to values of sales.

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Change in stock = Closing stock – Opening stock

Value of Output = Sales

Value of Output = Sales + Change in stock

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  • Export is part of sales.

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  • Exports are not separately included in value of output if sales are given.

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  • If domestic sales are given, to find the total sales exports need to be included.

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Sales = Domestic Sales + Exports

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Intermediate consumption

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  • Use of intermediate goods in the production process is termed as intermediate consumption.

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  • Intermediate goods include all those goods, whose value is merged with the value of final goods.

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  • Generally, it includes value of raw material.

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  • Imports are part of Intermediate goods

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  • If value of intermediate consumption is given, then imports are not included separately.

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  • If domestic intermediate cost is given, then it is necessary to add imports.

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Intermediate Consumption = Domestic intermediate consumption + Imports

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Steps of

Value Added Method

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Step – 1

Identify and classify the production Unit

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All the production units in the domestic economy are classified into three sectors on the nature of production process.

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Step – 2

Estimation of GVA by each sector

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The second step is estimation of gross value added at market price by each of the producing enterprises.

Gross Value Added = Value of output – Intermediate consumption

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Step – 3

Estimation of GDPMP

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By adding up Gross value added at market price of all sectors we get GDPMP.

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Sum total of GVAMP of all production sectors, is called GDPMP.

ƩGVAMP = GDPMP

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Step – 4

Estimation of National Income

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Net factor income from Abroad is added, depreciation and net indirect taxes are subtracted from GDPMP to arrive at National Income.

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NNPFC = GDPMP – CFC + NFIA - NIT

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Precautions

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  • Intermediate goods are not included in the national income.

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  • Sale and purchase of second- hand goods is not included.

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  • Production of services for self-consumption are not included.

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  • Production of Goods for self- consumption will be included.

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  • Imputed value of owner-occupied houses should be included

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  • Change in stock of Goods will be included.

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Problem of Double Counting

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  • Double counting refers to counting of an output more than once while passing through various stages of production.

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  • In measuring of National Income, the value of only final goods and services is to be included.

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  • The problem of double counting arises when value of intermediate goods is also included along with value of final goods.

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Example

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There are two methods to avoid double counting.

  1. Final Output method
  2. Value added method

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Farmer

Miller

Baker

Consumers

Output

Sells wheat

For ₹500

Sells flour

For ₹700

Sells Bread

For ₹1000

Value of Output

Value of input

Value Added

Wheat

₹500

Zero

₹500

₹200

₹500

₹700

flour

₹300

₹700

₹1000

Bread

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Numerical Examples

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Question- 1

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Calculate gross value added at market price (GVAMP)

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Items ₹ in crores

Sales 1050

Closing stock 45

Opening stock 25

Purchase of machine 200

Intermediate consumption 450

Purchase of raw material 200

Exports 45

Imports 30

Consumption of fixed capital 60

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Calculate gross value added at market price (GVAMP)

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Items ₹ in crores

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Sales 1050

Closing stock 45

Opening stock 25

Purchase of machine 200

Intermediate

consumption 450

Purchase of raw

material 200

Exports 45

Imports 30

Consumption of

fixed capital 60

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GVAMP

= Value of Output

- Intermediate Consumption

= 45

- 25

= 1070 Crores

Value of Output

= Sales

+ change in stock

Change in stock

= Closing stock

- Opening stock

= 20 crores

Value of Output

= 1050

+ 20

GVAMP

= 1070

- 450

= 620 Crores

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Question- 2

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Calculate gross value added at Factor cost (GVAFC)

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Items ₹ in crores

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Sales 450

Value of output 700

Closing stock 40

Consumption of fixed capital 35

Subsidies 25

Purchase of raw material from domestic market 40

Exports 35

Imports 25

Rent 100

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Calculate gross value added at Factor cost (GVAFC)

​

Items ₹ in crores

​

Sales 450

Value of output 700

Closing stock 40

Consumption of Fixed

capital 35

Subsidies 25

Purchase of raw material from domestic market 40

Exports 35

Imports 25

Rent 100

​

GVAMP

= Value of Output

- Intermediate Consumption

=

+ 25

= 635 Crores

Intermediate consumption

Purchase of raw material from domestic market

+ Imports

- NIT

= IT

- Subsidies

= 65 crores

= 40

- 25

GVAMP

= 700

- 65

= 660 Crores

GVAFC

= GVAMP

NIT

= 0

- (-25)

GVAFC

= 635

= (-)25 Crores

+ 25

= 635

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Question- 3

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Calculate Net value added at Factor cost (NVAFC)

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Items ₹ in crores

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Sales 450

Purchase of machine 100

Import of raw material 55

Depreciation 25

Subsidies 40

Purchase of raw material 200

Exports 25

Sales tax 35

Excise duty 20

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Calculate Net value added at Factor cost (NVAFC)

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Items ₹ in crores

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Sales 450

Purchase of machine 100

Import of raw material 55

Depreciation 25

Subsidies 40

Purchase of raw material 200

Exports 25

Sales tax 35

Excise duty 20

​

GVAMP

= Value of Output

- Intermediate Consumption

= 250 Crores

- CFC

= IT

- Subsidies

- 40

= 450 Crores

= 450

+ 0

= 210 Crores

NVAFC

= GVAMP

NIT

= ( 35 + 20 )

- 25

NVAFC

= 250

= 15 Crores

- 40

= 250

Value of Output

= Sales

+ change in stock

- NIT

GVAMP

= 450

- 200

- 15

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Question- 4

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Calculate GDPMP and National Income.

Items ₹ in crores

Sales by firm A 300

Sales by firm B to A 100

Sales by firm A to firm B 50

Sales by firm B to households 50

Change in stock of firm A 25

Closing stock of firm B 20

Opening stock of firm B 10

Exports of firm A 35

Imports of firm B 25

Imports of firm A 25

Exports of firm B 30

Net Indirect taxes 20

Consumption of fixed capital 10

Net factor income from abroad (-) 5

Wages and salaries 200

Rent 100

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Calculate GDPMP and National Income.

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Items ₹ in crores

Sales by firm A 300

Sales by firm B to A 100

Sales by firm A to firm B 50

Sales by firm B to households 50

Change in stock of firm A 25

Closing stock of firm B 20

Opening stock of firm B 10

Exports of firm A 35

Imports of firm B 25

Imports of firm A 25

Exports of firm B 30

Net Indirect taxes 20

Consumption of fixed capital 10

Net factor income from abroad (-) 5

Wages and salaries 200

Rent 100

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GVA of firm A

= Value of Output

- Intermediate Consumption

= 325 Crores

= 300

+ 25

Value of Output

= Sales

+ change in stock

Intermediate Consumption

= 100

+ 25

= 200 Crores

GVA of firm A

= 325

- 125

= 125 Crores

GVA of firm B

= Value of Output

- Intermediate Consumption

Value of Output

= Sales

+ change in stock

Sales

= 100

+ 30

+ 50

= 180 Crores

Change in stock

= 20

- 10

= 10 Crores

Value of Output

= 180

+ 10

= 190 Crores

Intermediate Consumption

= 50

+ 25

= 75 Crores

GVA of firm B

= 190

- 75

= 115 Crores

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Calculate GDPMP and National Income.

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Items ₹ in crores

Sales by firm A 300

Sales by firm B to A 100

Sales by firm A to firm B 50

Sales by firm B to households 50

Change in stock of firm A 25

Closing stock of firm B 20

Opening stock of firm B 10

Exports of firm A 35

Imports of firm B 25

Imports of firm A 25

Exports of firm B 30

Net Indirect taxes 20

Consumption of fixed capital 10

Net factor income from abroad (-) 5

Wages and salaries 200

Rent 100

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GVA of firm A = 200 crore

NNPFC

GVA of firm B = 115 crore

= GVA of firm A

+ GVA of firm B

= 200

+ 115

= 315 Crores

GDPMP

= GDPMP

- CFC

+ NFIA

- NIT

= 315

- 10

+ (-5)

- 20

= 315

- 10

- 5

- 20

= 315

- 35

= 280 Crores

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ANKIT KUMAR

PGT, ECONOMICS

Thank

You