Methods of calculating national income - Value Added/Product Method

The value added by a producer equals the value of its output minus the value of intermediate consumption purchased from other producers. Deducting intermediate inputs removes the value already counted at earlier production stages and leaves only the new contribution made by the producer. This prevents double counting while measuring national income through the product method.

The correct answer is D, 550. Gross value added (GVA) is calculated by subtracting the value of intermediate consumption from the value of output: GVA = Value of Output − Intermediate Consumption = 900 − 350 = 550. Intermediate consumption represents the value of goods and services used up during production. Subtracting it prevents the value of inputs from being counted again in the value of final output, thereby avoiding double counting.

Net value added at factor cost is calculated in two stages. First, subtract depreciation from gross value added at market price: 1000 − 100 = 900. This gives net value added at market price. Next, subtract net indirect taxes to convert market price into factor cost: 900 − 80 = 820. Therefore, option C, 820, is correct.

Net value added is calculated by subtracting intermediate consumption and depreciation from the value of output. First, gross value added equals 1000 − 600 = 400. Then depreciation is deducted: 400 − 50 = 350. Therefore, net value added is 350, so option C is correct. Option B is only the gross value added, not the net value added.

The same intermediate good may be sold several times as it moves through production. Adding every sale would count its value repeatedly. Summing only the value added at each production stage, or counting only final goods, avoids this double counting. Hence, option D is correct.

An old machine is a previously produced capital good, so its original production value was already included in national income in the year it was made. Counting its full resale price again would double count the same production. Only a current service, such as a broker’s commission, may be included.

The old car itself was produced in an earlier period, so its resale value must not be counted again in current production. However, the agent provides a real brokerage service during the current year. The commission is payment for this newly produced service and is therefore included in the product or value-added method.

The purchase of an existing share is a financial transaction, not a payment for newly produced goods or services. It merely transfers ownership of a financial asset from the seller to the buyer. Therefore, the amount paid for the share is excluded from the product method, although a separately charged brokerage service may be counted.

Value added at each stage is calculated by subtracting the value of intermediate inputs from the value of output. The farmer adds ₹100, the mill adds ₹160 − ₹100 = ₹60, and the bakery adds ₹250 − ₹160 = ₹90. Total value added is ₹100 + ₹60 + ₹90 = ₹250, equal to the final bread value. Adding all sales, ₹510, would double-count intermediate products.

Gross value added of all producing units, after appropriate valuation at market prices, represents gross domestic product at market price. Net domestic product is obtained by deducting consumption of fixed capital, commonly called depreciation. Thus, NDP at market price = ₹5,000 − ₹400 = ₹4,600. Depreciation is subtracted because it represents the loss of value of fixed assets during production.

National income is defined as net national product at factor cost. It is obtained by adding net factor income from abroad to net domestic product at factor cost. Hence, national income = ₹4,300 + ₹200 = ₹4,500. The positive foreign factor income means residents earned more factor income from abroad than non-residents earned domestically, so it increases the domestic measure.

Domestic product is based on production within a country’s domestic territory, regardless of who owns the factors. National product is based on the factor income of the country’s normal residents, wherever that income is earned. The conversion is made by adding net factor income from abroad: National Product = Domestic Product + NFIA. Therefore, NFIA is the main distinguishing element.

Domestic product follows the territory or location principle. It includes the value added generated by all producing units operating within the country’s domestic territory, whether the firms are locally or foreign owned. Thus, a foreign company’s local production is included in GDP or domestic product. The ownership of the company matters for national product, where factor income from abroad is considered.

Grain produced by a farmer is a current production activity even when the farmer consumes it within the household instead of selling it in a market. To include it in national-income accounting, statisticians assign an imputed value based on its estimated market price. This records the production without requiring an actual cash sale. Therefore, option A is correct.

Household activities such as cooking, cleaning, or caring for family members may provide real services, but they are usually performed without a market exchange or recorded payment. Since national-income accounts primarily measure marketed or reliably valued production, these unpaid services are generally excluded. If a similar service is purchased from a paid worker, its market value can be included.

A doctor employed by a government hospital provides a current and economically productive medical service. The doctor receives a salary, which gives the service an observable monetary value. Government provision does not make the service non-economic; the compensation paid for the service is recorded as part of current production. Therefore, the salaried service is included and option B is correct.

A government pension is generally a transfer payment made to a person because of past service, retirement status, or social entitlement. It is not a payment for a currently produced good or service during the accounting period. Counting it as current output would double-count income without recording new production. Thus, it is excluded from the product method, making option A correct.

A lottery prize is a windfall or transfer receipt rather than income earned by supplying labour, land, capital, or entrepreneurship in current production. The payment transfers purchasing power from participants or the organiser to the winner, but it does not represent newly produced output. National income includes factor earnings linked with production, so the lottery prize is excluded and option C is correct.

Illegal production may involve goods or services that have economic value, but it is generally hidden from official authorities and therefore absent from reliable administrative records and surveys. This makes its quantity and value difficult to measure consistently in the product method. The exclusion is mainly a measurement and recognition problem, not because illegal output is automatically a final good, depreciation, or subsidy. Hence, option D is correct.

Value added is the contribution made by a producer to the value of goods or services. It is calculated as the value of output minus the cost of intermediate inputs. Here, the hotel’s output is worth 500 and the materials used as intermediate consumption cost 200. Therefore, value added = 500 − 200 = 300. The answer is 300.

Under the product method, the value of output includes sales plus the change in stock. Thus, value of output = 800 + 50 = 850. Gross value added is obtained by subtracting intermediate consumption from this output value: 850 − 300 = 550. Therefore, option B is correct. The figure 850 is only the value of output, not gross value added.

A decrease in stock is a negative change in inventory, so it must be deducted from sales to calculate the value of output. Value of output = 900 − 70 = 830. Value added is then calculated as output minus intermediate consumption: 830 − 400 = 430. Therefore, option C is correct. Adding the stock decrease would give an incorrect result.

An owner-occupied house provides a housing service to its owner even though no rent is actually paid. To measure the value of economic services produced and consumed, national-income accounting assigns an imputed rent equal to the estimated rent that the house could have earned in the market. This estimated housing service is included in output, so option C is correct.

A new machine is purchased as a capital asset and is used repeatedly in production over several years. Its purchase represents investment and adds to the economy’s capital stock, rather than being completely consumed as an input during the current production period. Therefore, it is treated as a final investment good. Option A is correct.

Value added is the difference between the value of output and the value of intermediate consumption. This newly created value is distributed among the factors of production as wages to labour, rent to land, interest to capital, and profit to the entrepreneur. Therefore, value added links the product method with the income method of measuring national income.