Methods of calculating national income - Value Added/Product Method

An agent who arranges or facilitates the sale of an old car provides a service during the current year. The commission is payment for that newly produced service and is included in current production. The old car itself was produced earlier, while a gift and a deposit of old savings are transfers or financial transactions, not current output.

Finished goods used by the producing company itself are still the result of current production. They may not generate a market sale, but their imputed or estimated market value must be included in the value of output. Thus, the value of output in this example is ₹9,00,000 plus ₹3,00,000, or ₹12,00,000, assuming no stock adjustment or other relevant item is given.

Domestic income at factor cost is obtained by adding the NVA at factor cost of the primary, secondary, and tertiary sectors. Therefore, primary-sector NVA at factor cost equals total domestic income minus the contributions of the other two sectors: ₹2,700 crore − ₹850 crore − ₹1,150 crore = ₹700 crore. Hence, option A is correct.

The production or value added method first leads to a domestic measure, such as NDP at factor cost or domestic income, after making the necessary adjustments for depreciation and net indirect taxes. To convert domestic income into national income, net factor income from abroad is added. This accounts for factor income received from abroad minus factor income paid to the rest of the world.

Intermediate goods may be sold several times as they move through different production stages. Adding the full sales value at every stage would count the same inputs repeatedly. The value added method avoids this problem by adding only the additional value created by each unit, calculated as its output value minus the value of intermediate inputs. The sum of all value added equals the value of final output.

The principal of a bank loan is a financial transaction that creates a liability for the producer and an asset for the lender. It does not represent goods or services produced during the current period. Consequently, it is excluded from value added and national income calculations. Only any current production-related service, such as interest or banking service charges when treated under the relevant accounting framework, may be considered separately; the loan principal itself is not output.

An owner-occupied house provides a housing service even though no rent is actually paid to a landlord. National-income accounting imputes, or estimates, the rent that the owner would have paid for a similar dwelling. Including this amount records the current housing service and keeps comparison with rented housing consistent. It is not a wage, intermediate input or imported service. Therefore, option A is correct.

GDP measures current production. The old car was counted when it was originally manufactured, so its entire resale price is not counted again. However, the dealer performs a brokerage service in the current year, and the commission is payment for that newly produced service, so it is included. Share purchases are financial transactions and pensions are transfer payments, neither of which represents current production. Thus, option C is correct.

Intermediate consumption consists of goods and services used up during current production. Raw materials of ₹3,00,000 and electricity input of ₹50,000 meet this definition, so they are added: ₹3,00,000 + ₹50,000 = ₹3,50,000. Rent and wages are factor payments that distribute the value created; they are not intermediate consumption. Therefore, option A is correct.

Many government services, such as public administration, defence and basic public education, are supplied free or at prices that do not reflect their economic value. Since there is no reliable market selling price, national-income accounts value their output by the cost of producing it, including relevant employee compensation and other production costs. Profit, stock-market value and export price are unsuitable. Therefore, option A is correct.

Value added is the value of current output minus intermediate consumption. Wages paid to production workers are factor payments generated from current production and therefore form part of the distribution of value added. Raw materials and purchased electricity are intermediate inputs and must be deducted. Selling an old machine is not current manufacturing output. Thus, wages are the appropriate answer and option B is correct.

Value of output is calculated as sales plus the change in stock: Value of output = sales + (closing stock − opening stock). Here, the closing stock is ₹45,000 lower, so the change in stock is −₹45,000. Therefore, value of output = ₹9,80,000 − ₹45,000 = ₹9,35,000. A fall in stock means that some goods sold were produced earlier, so current output is lower than current sales.

First calculate net factor income from abroad: NFIA = factor income received from abroad − factor income paid abroad = ₹340 crore − ₹420 crore = −₹80 crore. National income = domestic income + NFIA = ₹5,500 crore + (−₹80 crore) = ₹5,420 crore. Since payments to foreign factors exceed receipts from abroad, NFIA is negative.

National-income accounting generally includes market production for which a monetary value can be observed or reliably estimated. Unpaid household activities, such as cooking or cleaning for one's own family, are not normally exchanged in markets. Their quantity, quality, and suitable market price are difficult to measure consistently. Thus, they are generally excluded from measured value added, although they provide real economic benefits.

Intermediate consumption includes the value of all goods and services used up as inputs during production, whether those inputs are purchased domestically or imported. Therefore, both raw-material amounts must be deducted: ₹2,00,000 + ₹3,00,000 = ₹5,00,000. Value added is obtained by subtracting total intermediate consumption from the value of output; the source of the input does not remove it from this calculation.

A raw material bought by one firm is used in producing another good or service rather than being counted as a separate final output. Its value becomes embodied in the value of the final product. If the raw material and the final product were both added, the same production value would be counted more than once. Therefore, it is treated as intermediate consumption and subtracted when calculating value added: value added = output value − intermediate consumption.

A new truck is a durable capital good used repeatedly in production over several years. Its purchase is treated as gross fixed capital formation, not as an input completely used up during the current production period. Fuel, in contrast, is consumed during operations and is used up in providing output, so it is intermediate consumption. Hence, option A gives the correct classification.

Chalk is a non-durable input consumed while the school provides educational services, so its purchase is intermediate consumption. Teachers' salaries are payments to labour for its contribution to production. They are therefore factor income, specifically compensation of employees. The two items have different accounting roles: chalk is an input deducted from output, while salaries are part of the income generated by production.

Under the value added method, the value of the final product equals the sum of value added at every stage of production. Therefore, the final seller's value added is calculated as ₹5,00,000 − (₹90,000 + ₹1,40,000 + ₹1,10,000) = ₹5,00,000 − ₹3,40,000 = ₹1,60,000. This prevents double counting of intermediate goods.

Sales during a year may include goods produced in an earlier year, while some goods produced in the current year may remain unsold and enter closing stock. The stock-change adjustment converts sales into the value of current-year production, ensuring that output is measured for the correct period and that national income is not overstated or understated.

Non-market government services usually have no observable market price because they are supplied free of charge or at nominal prices. Therefore, their output is generally valued at the cost of production. Here, total cost equals compensation of employees ₹9 crore + intermediate consumption ₹2 crore + depreciation ₹1 crore = ₹12 crore. Thus, the value of output is ₹12 crore.

Gross value added at market prices is calculated as the value of output minus intermediate consumption. Thus, GVA₍MP₎ = ₹12 crore − ₹2 crore = ₹10 crore. The deduction is necessary because intermediate goods and services have already embodied the value created by other producers; subtracting them isolates the new value created by the government service during the period.

Market prices include product taxes and are reduced by product subsidies. To convert a value measured at market prices into factor-cost value, net indirect tax, calculated as indirect taxes minus subsidies, must be deducted. Intermediate consumption is still deducted separately when calculating GVA, and depreciation is relevant only when moving from gross to net measures.

Finished goods sent by a producing unit to its own branch are still part of the current period’s production. The goods have been produced and transferred for use or sale through the branch, even though they have not yet been sold to an outside customer. Therefore, their appropriate value must be included in the value of output. Excluding them would understate production, while treating them as intermediate consumption, transfer payment, or depreciation would be conceptually incorrect.

A lottery winning is a windfall gain because it is received without providing a current productive good or service. It is not generated by the production process and therefore does not represent value added. In contrast, factory production, banking services, and rental services are economic activities that provide goods or services during the period and can contribute to measured production or value added. Hence, lottery winning is excluded.