Methods of calculating national income - Value Added/Product Method

Correct answer: A. Intermediate consumption

Explanation: Raw materials, fuel, and productive services purchased from other producers and used up during the production process are called intermediate consumption. Their value is deducted from the firm’s gross output to calculate gross value added. Final consumption refers to goods and services used by final users, while depreciation measures the use or loss of fixed capital.

Correct answer: B. ₹2,40,000

Explanation: Under the value-added or product method, GVA at market prices equals the value of output minus intermediate consumption. Therefore, intermediate consumption = Value of output − GVAₘₚ = ₹3,60,000 − ₹1,20,000 = ₹2,40,000. Hence, option B is correct. Intermediate consumption represents the value of goods and services used as inputs during production, excluding the value added by the firm itself.

Correct answer: B. Only the newly added value

Explanation: At every stage of production, a producer transforms inputs and adds some value to them. The value-added method counts only this additional value, calculated as the value of output minus the value of intermediate consumption. Counting total sales at every stage would count the same intermediate goods repeatedly and create double counting. Hence option B is correct.

Correct answer: A. The value of finished goods produced during the current year

Explanation: A producer's value of output records the market value of goods and services produced during the relevant accounting period. Finished goods made in the current year are therefore part of output, whether they are sold immediately or remain in inventory. Private consumption of an existing product, sale of an old machine, and a bank loan are not current production; they are consumption, asset transfer, and finance respectively.

Correct answer: B. ₹5,45,000

Explanation: The relationship is GVA at market price = GVA at factor cost + net indirect taxes. Net indirect tax means indirect taxes minus subsidies, so a positive amount must be added when converting factor-cost valuation into market-price valuation. Therefore, GVA at market price = ₹5,00,000 + ₹45,000 = ₹5,45,000. Hence option B is correct.

Correct answer: A. Intermediate consumption

Explanation: Materials used by a firm, such as purchased flour, fuel, or components, are consumed as inputs during production. Their value is recorded as intermediate consumption and is deducted from the firm's gross output to calculate gross value added. This deduction prevents the same output from being counted repeatedly at different production stages. Hence, option A is correct.

Correct answer: A. Its output or service sales

Explanation: The same transaction has different accounting viewpoints for the buyer and the seller. For the cleaning company, the service supplied to the factory is its own output, and the fee received is the value of that service sale. It is not depreciation, an import, or a transfer payment. Thus, the company records it as output or service sales, making option A correct.

Correct answer: A. Add net factor income from abroad

Explanation: Domestic income measures the factor income generated within a country's domestic territory, regardless of who owns the factors of production. National income measures factor income accruing to normal residents. Therefore, net factor income from abroad (NFIA) must be added: National income = Domestic income + NFIA. Intermediate consumption, old goods, and transfer payments are not the required adjustment.

Correct answer: A. Intermediate consumption

Explanation: The basic formula is value added = value of output − intermediate consumption. Raw materials, fuel, and other intermediate inputs have already appeared in the output of other producers, so deducting them prevents double counting. Compensation of employees is a component of income, while depreciation is deducted only when converting gross value added into net value added.

Correct answer: A. Purchase of raw material such as wheat

Explanation: Under the product method, value added equals the value of output minus intermediate consumption. Wheat purchased by a flour mill is used as a raw material and becomes part of the production process, so its cost is deducted. Wages, depreciation and entrepreneurial profit are components or distributions of value added, not intermediate inputs.

Correct answer: B. ₹7,85,000

Explanation: Intermediate consumption is the value of goods and services used up as inputs during the production process. Imported raw material, domestic raw material, and an outsourced production-related service are all current intermediate inputs in this question. Therefore, total intermediate consumption is ₹4,50,000 + ₹2,75,000 + ₹60,000 = ₹7,85,000. The correct answer is option B.

Correct answer: B. ₹10,220 करोड़

Explanation: First add the net value added at factor cost of the three domestic sectors to obtain domestic income: ₹2,350 crore + ₹3,140 crore + ₹4,510 crore = ₹10,000 crore. National income is domestic income plus net factor income from abroad. Therefore, ₹10,000 crore + ₹220 crore = ₹10,220 crore. The correct answer is option B.

Correct answer: A. ₹50

Explanation: Under the final-product approach, only the market value of the final bread is counted, so the addition is ₹50. The flour costing ₹20 is an intermediate input whose value has already been embodied in the bread’s selling price. Counting ₹20 separately and then adding ₹50 would record the flour twice and produce ₹70, which overstates national output. Therefore option A is correct.

Correct answer: A. ₹4,900 crore

Explanation: Gross value added is calculated by subtracting intermediate consumption from the value of total output: GVA = total output − intermediate consumption. Therefore, GVA = ₹8,000 crore − ₹3,100 crore = ₹4,900 crore. Intermediate consumption is deducted because its value has already been embodied in the inputs used for production and must not be counted again as fresh value added.

Correct answer: A. 1600 crore

Explanation: Gross value added is calculated by subtracting intermediate consumption from the value of output: GVA = Value of output − Intermediate consumption. Thus, GVA = 2500 − 900 = 1600 crore. Intermediate consumption is deducted because it represents the value of inputs used up during production; including it again would cause double counting in the measurement of domestic product.

Correct answer: A. 3,050 crore

Explanation: Value added is calculated by subtracting intermediate consumption from the value of total output. Therefore, value added = 4,800 - 1,750 = 3,050 crore. The intermediate inputs are deducted because their value is embodied in the output and may otherwise be counted again. Thus, 3,050 crore represents the new value created by production, making option A correct.

Correct answer: A. Government final consumption expenditure

Explanation: In the expenditure formula GDP = C + I + G + (X − M), G represents government final consumption expenditure. It includes the government’s spending on currently produced goods and services, such as public administration, defence and many public services. Transfer payments, such as pensions or unemployment benefits, are not payments for current production and are therefore excluded from G.

Correct answer: A. ₹4,400 crore

Explanation: Gross Value Added is calculated by subtracting intermediate consumption from the value of output: GVA = Output − Intermediate Consumption. Therefore, GVA = ₹7,200 crore − ₹2,800 crore = ₹4,400 crore. Subtracting intermediate consumption avoids double counting the value of inputs that were already produced and included in another producer’s output.

Correct answer: D. 180 lakh

Explanation: Gross value added measures the new value created by a producer. It is calculated by subtracting the value of intermediate consumption from the value of total output. Therefore, GVA = output value − intermediate consumption = 500 lakh − 320 lakh = 180 lakh. The output value and intermediate consumption are not themselves the value added; only the difference represents the factory's contribution to production.

Correct answer: D. ₹280 crore

Explanation: Value added measures the contribution made by a producer or sector after deducting the value of intermediate goods and services used during production. The formula is value added = value of output − intermediate consumption. Hence, value added = ₹800 crore − ₹520 crore = ₹280 crore. Subtracting intermediate consumption prevents the same output from being counted repeatedly at different production stages.

Correct answer: B. 3800

Explanation: Value added measures the contribution made by a producer or industry to total output. It is calculated as the value of output minus the value of intermediate consumption used up during production. Therefore, value added = 6400 − 2600 = 3800. Adding the two figures would double-count intermediate goods rather than measure net contribution.

Correct answer: A. Double counting

Explanation: The value of the wood is an intermediate input used to make the furniture. Its value is already embodied in the selling price of the final furniture. Adding the full value of the wood and the full value of the furniture counts the same production more than once and overstates total output. National income accounting avoids this through the value-added method or by counting only final goods.

Correct answer: A. 400

Explanation: Value added is the additional value created by a producer. It is calculated by subtracting the cost of intermediate inputs from the value of the final output. Here, value added equals 1000 minus 600, or 400. Counting the full 1000 without deducting raw-material cost would double-count the intermediate input.

Correct answer: C. Output value minus intermediate consumption

Explanation: The governing concept in the value-added or product method is that only the value created by a producer should be counted. Gross value added (GVA) equals the value of output minus the value of intermediate goods and services used up in production. Thus option C is correct. Adding intermediate consumption would double-count inputs, while subtracting wages or adding depreciation does not define GVA.

Correct answer: C. 1000 crore rupees

Explanation: Under the value-added method, the net value added generated by all domestic producing units is added to obtain NDP, provided that no further production-tax or subsidy adjustment is needed. Thus, NDPFC = 300 + 450 + 250 = 1000 crore rupees. Hence, option C is correct.