Methods of calculating national income - Value Added/Product Method

Correct answer: A. Net factor income from abroad is added

Explanation: Domestic income measures factor income generated within the domestic territory, whereas national income measures factor income accruing to the normal residents of a country. The conversion is made by adding net factor income from abroad: national income = domestic income + factor income received from abroad − factor income paid abroad. Thus, option A is correct.

Correct answer: B. National income will be less than domestic income

Explanation: National income is obtained from domestic income by adding net factor income from abroad: national income = domestic income + NFIA. If NFIA is negative, it represents a net outflow of factor income, so the negative amount is subtracted from domestic income. Consequently, national income will be lower than domestic income. Therefore, option B is correct.

Correct answer: A. It will be greater than domestic income

Explanation: National income is calculated by adding net factor income from abroad to domestic income. When net factor income from abroad is positive, residents receive more factor income from abroad than foreigners receive from domestic territory. This positive amount increases domestic income in the conversion to national income. Hence, national income will be greater than domestic income, so option A is correct.

Correct answer: B. 110

Explanation: Value added is calculated by subtracting the value of intermediate consumption from the value of output: Value Added = Value of Output − Intermediate Consumption. Therefore, 180 − 70 = 110. The amount 70 represents only the inputs used up during production, while 180 is the total output value. Hence, option B is correct.

Correct answer: C. 175

Explanation: Gross Value Added (GVA) is obtained by deducting intermediate consumption from the value of output. Thus, GVA = 300 − 125 = 175. This subtraction prevents the value of inputs purchased from other producers from being counted again in the value of final production. Therefore, option C, 175, is correct.

Correct answer: D. 205

Explanation: Net Value Added is found by subtracting depreciation from Gross Value Added because depreciation represents the loss of value of fixed capital used in production. Therefore, NVA = GVA − Depreciation = 240 − 35 = 205. Option A incorrectly adds depreciation, while options B and C give only one of the supplied figures. Thus, option D is correct.

Correct answer: B. 260

Explanation: To convert Net Value Added at Market Price into Net Value Added at Factor Cost, subtract Net Indirect Tax, because the market price includes indirect taxes net of subsidies. Therefore, NVA at factor cost = 300 − 40 = 260. Adding the tax would move in the wrong direction. Hence, option B is correct.

Correct answer: C. 750

Explanation: National Product is obtained by adding Net Factor Income from Abroad to Domestic Product: National Product = Domestic Product + Net Factor Income from Abroad. Since the income from abroad is positive, 700 + 50 = 750. Therefore, option C is correct. If the foreign factor income had been negative, it would have reduced the domestic product.

Correct answer: D. 860

Explanation: National Product equals Domestic Product plus Net Factor Income from Abroad. Here the net factor income is negative: 900 + (−40) = 900 − 40 = 860. A negative foreign factor income means that factor payments to the rest of the world exceed factor income received from abroad. Therefore, option D is correct.

Correct answer: A. When its estimated market value can be assigned

Explanation: Farm output retained by the farmer for self-consumption is still an economic production activity. It may be included in national income when a reliable estimated market value can be assigned to that wheat. Valuing it at the relevant market price records the production even though no actual sale occurred. Therefore, option A is correct.

Correct answer: A. Because it usually has no recorded market transaction

Explanation: Unpaid household services, such as cooking, cleaning, or caring for family members, create useful benefits but are generally performed without a market exchange. Since there is usually no observable price or recorded transaction, their monetary value is difficult to measure consistently. For this reason, they are generally excluded from national income estimates. Option A is correct.

Correct answer: A. Because it is a productive service

Explanation: A paid doctor service is a current service produced by the doctor and purchased by a patient. It has an observable monetary value and contributes to current economic activity, even though it is intangible rather than a physical good. Therefore, its fee can be counted as part of measured output under the product method. Option A is correct.

Correct answer: C. Full resale value of an old table

Explanation: The full resale price of an old table is not included in the current year’s value added because the table’s production value was already recorded in the year it was originally produced. Counting its entire resale value again would cause double counting. However, any current service connected with the resale, such as a broker’s commission, may be included because that service creates new value in the current period.

Correct answer: A. Agricultural production

Explanation: Agricultural production belongs to the primary sector because it obtains goods directly from nature, such as crops, livestock or other biological resources. In the value-added method, the value added created by agriculture is included along with the value added of manufacturing and services. A textile mill belongs to the secondary sector, while banking and school services belong to the tertiary sector.

Correct answer: B. Manufacturing

Explanation: Manufacturing is a secondary-sector activity because it transforms raw materials into finished or semi-finished goods and adds value during the process. Fishing is a primary activity because it directly uses natural resources. Banking and teaching are tertiary activities because they provide services. The value added produced by each of these sectors is included separately and then combined in the product method.

Correct answer: C. Banking

Explanation: Banking is a tertiary-sector activity because it provides financial services rather than extracting natural resources or manufacturing physical goods. Mining and farming are primary-sector activities, while textile production is a secondary-sector activity. Under the value-added method, the value created by banking services is included in national output along with the value added generated by primary and secondary activities.

Correct answer: A. To properly add value added of all sectors

Explanation: Sectoral classification divides the economy into primary, secondary and tertiary sectors so that the value added generated by each sector can be identified, measured and added systematically. This improves the accuracy and transparency of the product method and helps avoid omission or double counting. It also shows how much agriculture, industry and services contribute to national output.

Correct answer: A. 40

Explanation: Value added is calculated as the value of output minus the value of intermediate consumption. Here, output sold is 90 and the raw material used as an intermediate input costs 50. Therefore, value added = 90 − 50 = 40. The figure 90 is total output value, while 50 is the input cost; adding them would be incorrect and would not measure the producer’s newly created value.

Correct answer: B. ₹150

Explanation: Value added is calculated as the value of output minus the value of intermediate consumption. The finished shirt has an output value of ₹350, while the cloth purchased for ₹200 is an intermediate input used in production. Therefore, value added = ₹350 − ₹200 = ₹150. The amount of ₹350 is total sales, not the tailor’s contribution alone.

Correct answer: A. ₹350

Explanation: Under the value-added method, value added equals the value of output minus intermediate consumption. Here, the value of output is ₹1,000 and the value of intermediate goods and services used is ₹650. Thus, value added = ₹1,000 − ₹650 = ₹350. The figures ₹650 and ₹1,000 represent input cost and gross output respectively, not value added.

Correct answer: B. ₹425

Explanation: Net value added is obtained by deducting depreciation, also called consumption of fixed capital, from gross value added. Therefore, net value added = ₹500 − ₹75 = ₹425. The amount ₹500 is still the gross measure because depreciation has not been removed, while ₹75 is only the depreciation amount. Hence, option B is the only correct answer.

Correct answer: C. ₹55

Explanation: Net indirect tax is calculated by subtracting subsidies from indirect taxes because subsidies reduce the effective tax burden included in market prices. Thus, net indirect tax = indirect taxes − subsidies = ₹80 − ₹25 = ₹55. ₹80 is the gross indirect tax, ₹25 is the subsidy, and ₹105 incorrectly adds the two amounts.

Correct answer: A. Because they are not new goods or services produced

Explanation: The product method measures the value of goods and services produced during the current period. Gifts and donations are transfer payments or transfers of existing resources; they do not represent a new good or service produced in exchange for that payment. Including them would count a transfer rather than current production, so they are excluded from national income.

Correct answer: A. Because it is not payment for current production

Explanation: A government pension is transfer income because it is paid without a current productive service being supplied in return. The product method records the value of goods and services currently produced, not transfers of purchasing power from one person or institution to another. The pension may finance consumption, but the transfer itself is not new production and must not be counted separately.

Correct answer: A. Because they are not officially recorded and recognised

Explanation: The value-added method depends on reliable records of production, sales, costs, and income generated by economic units. Illegal activities are generally concealed and are not officially recorded or recognised in national accounts, making their output difficult to measure accurately and consistently. Therefore, they are generally excluded from official estimates, although some countries may use special estimates for certain unobserved activities.