Methods of calculating national income - Value Added/Product Method

Correct answer: A. The use or purpose of the good

Explanation: The classification depends on how the good is used in the production or consumption process. A good purchased for direct consumption or investment is a final good, whereas a good used as an input to produce another good is an intermediate good. Thus, the same product may be final for one buyer but intermediate for another.

Correct answer: B. An intermediate good

Explanation: Milk is an intermediate good for the sweet shop because it is purchased as a raw material and used to produce sweets. Its value becomes part of the value of the finished product. It is not a final consumption good for the shop, and it is not a capital good because it is consumed during production rather than used repeatedly as a fixed productive asset.

Correct answer: A. Because services also form part of economic production

Explanation: The product method measures the value of goods and services produced during a period. Services such as teaching, transport, banking, medical care and communication create utility and economic value even though they are not physical goods. Their value added must therefore be included to obtain a complete measure of domestic production and national income.

Correct answer: A. Adding the value of intermediate goods again with final goods

Explanation: The main danger in the value-added method is double counting. If the value of intermediate goods is added again after it has already been included in the price of final goods, national income is overstated. To avoid this error, economists either add value added at every production stage or count only final goods, but never both intermediate and final values together.

Correct answer: A. GVA = VO − IC

Explanation: Gross value added measures the value created by a producing unit or sector. It is calculated by subtracting the value of intermediate goods and services used during production from the value of total output: GVA = VO − IC. This subtraction prevents the value of inputs from being counted again.

Correct answer: B. 540

Explanation: Value of output includes both goods sold during the period and goods produced but added to stock. Therefore, when stock increases, the increase is added to sales: Value of Output = Sales + Increase in Stock = 500 + 40 = 540. Hence option B is correct; sales alone would omit unsold current production.

Correct answer: C. 670

Explanation: A decrease in stock means that sales are greater than the current production, because some goods sold came from earlier stock. To calculate current value of output, subtract the decrease in stock from sales: 700 − 30 = 670. Thus, option C is correct and 730 would incorrectly add the decrease.

Correct answer: A. 710

Explanation: Net value added is calculated by deducting consumption of fixed capital, also called depreciation, from gross value added. Therefore, NVA = GVA − Consumption of Fixed Capital = 800 − 90 = 710. The deduction reflects the loss of productive value of fixed assets during the period, so option A is correct.

Correct answer: D. ₹650

Explanation: The relationship is: net value added at market price = net value added at factor cost + net indirect taxes. Hence, ₹600 + ₹50 = ₹650. Net indirect taxes are added because market prices include taxes net of subsidies, whereas factor cost excludes them. Thus, option D is correct.

Correct answer: A. 75

Explanation: Net indirect taxes are calculated by subtracting subsidies from indirect taxes. The formula is: net indirect taxes = indirect taxes − subsidies. Substituting the given values gives 120 − 45 = 75. Subsidies reduce the effective burden of indirect taxes, so they must be deducted. Hence, option A, 75, is the correct answer.

Correct answer: B. −20

Explanation: Net indirect taxes are found by subtracting subsidies from indirect taxes: net indirect taxes = indirect taxes − subsidies. Therefore, the calculation is 40 − 60 = −20. The negative result means that subsidies are greater than indirect taxes, so the net effect is a deduction rather than a tax addition. Thus, option B is correct.

Correct answer: B. Intermediate good

Explanation: Milk purchased by a sweet shop is used as an input to produce another good, namely sweets. Since it is consumed during the production process and is not purchased for final use by the shop, it is an intermediate good for that producer. Its classification depends on its purpose and user; therefore, option B is correct.

Correct answer: D. ₹60

Explanation: For the mill, flour worth ₹160 is its gross output, while wheat worth ₹100 is an intermediate input purchased from the farmer. The mill’s value added is therefore output minus intermediate consumption: ₹160 − ₹100 = ₹60. The answer is not ₹160, because that is the mill’s total sales value before deducting the input cost.

Correct answer: A. ₹90

Explanation: The bakery purchases flour for ₹160 and transforms it into bread sold for ₹250. Its value added is the value of its output minus the cost of the intermediate input: ₹250 − ₹160 = ₹90. The figures ₹160 and ₹250 represent the input and total output respectively, while ₹410 incorrectly adds both and causes double counting.

Correct answer: A. 400

Explanation: Under the value-added method, value added equals the value of output minus the value of intermediate inputs used in producing that output. Here, the factory’s output is valued at 700 and the raw material, an intermediate input, costs 300. Thus, value added = 700 − 300 = 400. The amount 1000 is an incorrect addition, while 700 is gross output rather than value added.

Correct answer: B. 350

Explanation: The cloth is an intermediate input used by the tailor to produce the coat, so its cost must be deducted from the value of the tailor’s output. Value added = value of the coat − cost of cloth = 600 − 250 = 350. The figure 600 is the selling value of the final product, not the new value created by the tailor. Therefore, option B is correct.

Correct answer: C. 70

Explanation: Net indirect tax is calculated by subtracting subsidies from indirect taxes: Net indirect tax = Indirect tax − Subsidy. Therefore, 95 − 25 = 70. The amount 95 is only the gross indirect tax, while 25 is the subsidy that must be deducted. Thus, option C is correct. This concept is also used when converting a value at market price into factor cost.

Correct answer: D. −35

Explanation: The formula for net indirect tax is indirect tax minus subsidy, not subsidy minus indirect tax. Hence, Net indirect tax = 55 − 90 = −35. The negative result means that the subsidy exceeds the indirect tax by 35. Therefore, option D is correct. A positive 35 would incorrectly reverse the required order of subtraction.

Correct answer: A. 750

Explanation: Net value added is obtained by subtracting intermediate consumption and depreciation from the value of output. First, gross value added = 1500 − 650 = 850. Then depreciation is deducted: net value added = 850 − 100 = 750. Therefore, option A is correct. The figure 850 is gross value added, not net value added, because depreciation has not yet been removed.

Correct answer: C. Intermediate consumption

Explanation: Fuel that a firm buys and consumes during the production process is an intermediate input. It is not a final good for the firm because it is used up to produce another good or service. Under the value-added method, intermediate consumption is deducted from the value of output to avoid counting the fuel’s value again in the value of the final product. Therefore, the correct answer is intermediate consumption.

Correct answer: C. It will be less than sales — यह बिक्री से कम होगा

Explanation: The value-of-output formula is Value of Output = Sales + Closing Stock − Opening Stock. When closing stock is lower than opening stock, the stock change is negative. Subtracting this net decrease from sales makes the value of output lower than sales. Thus, option C correctly describes the relationship.

Correct answer: C. Bread bought by a household for consumption — परिवार द्वारा उपभोग के लिए खरीदी गई ब्रेड

Explanation: A final good is purchased for consumption, investment, or export and is not meant to be used as an input in another production process. Bread bought by a household for eating is a final consumption good. Flour, electricity, and wheat purchased by producers are intermediate inputs and must not be counted separately to avoid double counting.

Correct answer: C. ₹950 crore

Explanation: NVA at factor cost for all domestic sectors represents domestic income. National income is the sum of domestic income and net factor income from abroad: National Income = NVA₍FC₎ + NFIA = ₹900 crore + ₹50 crore = ₹950 crore. Therefore, option C is correct. No adjustment for depreciation, indirect taxes, or subsidies is needed because NVA at factor cost is already given.

Correct answer: B. It is the difference between value of output and intermediate consumption

Explanation: Value added measures the additional value created by a production unit. In the basic product-method expression, gross value added equals the value of output minus intermediate consumption. The resulting amount is not merely profit: it can cover compensation of employees, operating surplus or mixed income, depreciation, and relevant taxes depending on whether the measure is stated at market prices or factor cost.

Correct answer: A. To remove wear and tear of fixed capital and find net output

Explanation: Depreciation, also called consumption of fixed capital, represents the loss in value of machines, buildings, and other fixed assets caused by normal wear and tear or obsolescence during production. It is deducted from gross value added to obtain net value added. It is not deducted to increase intermediate consumption, add taxes, or account for imports.