VALUE ADDED / PRODUCT METHOD FOR MEASURING NATIONAL INCOME

Product method is that method which measures the national income by estimating the contribution of each producing enterprises to production in the domestic territory of the country in an accounting year. It is also known as value added method.
STEP I- Identification and Classification of Productive Enterprises
The first step of this method involves identification and classification of productive enterprises.
-          Primary Sector
-          Secondary Sector
-          Tertiary Sector

         STEP II- Classification of Output
The national output is classified into following categories
1) Production of consumer goods and services
2) Production of capital goods or Gross private domestic investment
3) Production by the Government

STEP III- Measurement of Value of Output
There are two methods for measuring the value of output-
1) Final Output Method
2) Value Added Method
FINAL OUTPUT METHOD
It involves estimation of following items
1)      Value of Output = Volume of Physical output  x  Market Price
2)      Value of Intermediate Consumption = Value of prices paid by the enterprises for the purchase of intermediate goods and services
3)       Consumption of Fixed Capital or depreciation= Depreciation is estimated according to existing rules and regulations.
National income is estimated by finding the market value of the goods and services produced in an economy in a year which is called as GDP at market price.
GNP at market price = GDP at market price + Net factor income from abroad
NNP at market price= GNP at market price – Depreciation
NNP at factor cost (National Income) = NNP at market price – Net Indirect Taxes

VALUE ADDED METHOD
Before measurement of value added, we should know its meaning.
Value added is difference between value of output and non-factor input.
Value of Output is sum of total sale and change of stock of the firm
Change in stock is difference between opening stock and closing stock
Value of Intermediate Consumption is estimated using the prices paid by the enterprises for the purchase of intermediate goods and services

Value Added = Value of Output – Non Factor Input or Value of Intermediate Consumption
Value of Output = Sales + Change in Stock
Change in Stock = Opening Stock – Closing Stock

Value of Output
Value can be added by following ways-
1)      Gross Value Added at Market Price =  Value of Output - Value of Intermediate Consumption
2)      Net Value added at Market Price= Gross Value Added at Market Price – Depreciation
3)      Net Value added at factor cost= Net Value added at Market Price- Net Indirect Tax
Net National Income = Net Value added at factor cost + Net factor income from abroad

Precautions regarding Value Added Method or Product Method

Items Included in Value Added Method
Items Excluded in Value Added Method
Imputed rent of owner occupied houses
Sales and purchases of second hand goods
Imputed value of goods and services produced for self-consumption or for free distribution
Sale of bonds by a company

Income of smuggler




DOUBLE COUNTING
Double counting means counting the value of same commodity more than once is called double counting. While estimating national income by using final output method, the value of only final goods and services is taken into consideration. But in actual practice, while taking the value of final goods, value of intermediate goods also gets included.
For Example, while calculating value of final value of goods like cycles, the value of intermediate goods (tubes, tyres, frames, bells etc.)  are also included. In this way certain goods are counted more than once which results in over- estimation of national product. This is the problem of double counting.
For Example,
- A farmer produces one ton of wheat and sells it for Rs.400 to Flour Mill. For farmer, sale of wheat is final sale.
-  Purchase of wheat by the Flour Mill is his intermediate goods. It converts wheat into flour and sells it for Rs.600 to a baker. For Flour Mill owner, flour is his final product.
- Purchase of flour by baker is his intermediate goods. It converts flour into bread and sells it for Rs.800 to the shopkeeper. For baker, bread is his final product.
-Purchase of bread by shopkeeper is his intermediate goods. He sells it for Rs.900 to final consumer.
Thus,
Value of Output = 400 + 600 + 800 + 900 = Rs.2700
Every producer treats its commodity as final product and value of the product is counted four times. This is called as double counting
How to Avoid the Problem of Double Counting?
Theoretically, there are two ways of avoiding double counting- 1) Final Output Method 2) Value Added Method. But practically, this problem is perfectly solved by value added method

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