Methods of calculating national income - Value Added/Product Method

Goods supplied to employees as remuneration in kind are still part of the firm’s current production. Their value is included in output, even though the firm does not receive a separate cash sale. The same transaction is also recorded as compensation of employees in kind, preventing the output from being omitted.

A normal business insurance policy provides risk-cover and related services used by the producer in conducting production. The premium is therefore treated as payment for an intermediate service and deducted as intermediate consumption when calculating the producer’s value added. It is not wages or capital formation.

Ordinary repairs merely maintain an existing factory and are a current service input used in production, so they can be treated as intermediate consumption. A newly constructed building provides productive assets over several years and is therefore fixed capital formation. It is not deducted as an intermediate input.

Intermediate consumption includes goods and services used up during the production process: raw material of ₹7 lakh, packing of ₹1 lakh, and outsourced IT service of ₹2 lakh. Thus, intermediate consumption equals 7 + 1 + 2 = ₹10 lakh. Wages and interest are payments to factors of production and are included in factor incomes, not intermediate consumption.

An outsourced legal advisory fee is payment for an external professional service used by the producer in conducting or supporting production and business operations. It is consumed as a current input rather than creating a lasting productive asset. Therefore, it is classified as intermediate service consumption and is deducted from the value of output when calculating GVA.

The value of the final product is obtained by adding the value created at every stage of production, including the retail trade margin. Therefore, final value = ₹55,000 + ₹72,000 + ₹48,000 + ₹25,000 = ₹2,00,000. Adding value added avoids counting the same intermediate product repeatedly.

For a service firm, the fee received represents the value of output. GVA at market price equals output minus intermediate consumption. Uniforms and equipment consumed in providing the service are intermediate inputs, so ₹1,20,000 − ₹18,000 = ₹1,02,000. Wages are factor payments and are not deducted when calculating value added.

An owner-occupied house provides housing services even though the owner does not pay rent to another person. National-income accounting therefore records an imputed rent as the estimated value of that service. It is a notional transaction, not actual cash income, and it is not intermediate consumption or the sale of an asset.

Under the value-added method, GVA equals the value of output minus total intermediate consumption. Therefore, total intermediate consumption is ₹32 lakh − ₹13.5 lakh = ₹18.5 lakh. This total includes both intermediate goods and intermediate services. Since services account for ₹4.2 lakh, intermediate goods input is ₹18.5 lakh − ₹4.2 lakh = ₹14.3 lakh. Hence, option A is correct.

Intermediate consumption includes goods and services used up during production. Here, raw materials ₹4,40,000, ordinary repairs ₹60,000 and fuel ₹80,000 are intermediate inputs. Wages and rent are factor payments, not intermediate consumption. Hence, total intermediate consumption is ₹4,40,000 + ₹60,000 + ₹80,000 = ₹5,80,000.

The classification of a good depends on its economic use, not on its physical identity or name. Milk bought by a household for drinking is a final good, whereas milk bought by a sweet-making firm is an intermediate input. The same product can therefore be final in one use and intermediate in another.

To convert GVA at factor cost into GVA at market prices, add net taxes on production and products. Net indirect taxes here are production taxes plus product taxes minus product subsidies: ₹70,000 + ₹1,10,000 − ₹55,000 = ₹1,25,000. Thus, GVA₍MP₎ = ₹11,80,000 + ₹1,25,000 = ₹13,05,000. Therefore, option A is correct.

The change in stock is closing stock minus opening stock. Here, it is an increase of ₹1,15,000, which represents goods produced during the current year but not yet sold. Therefore, value of output equals sales plus increase in stock: ₹12,75,000 + ₹1,15,000 = ₹13,90,000. Hence, option B is correct.

Domestic income measures factor income generated within a country’s domestic territory, regardless of whether the factors belong to residents or foreigners. National income measures factor income accruing to the country’s residents, including their income from abroad and excluding income sent abroad by foreign factors. Therefore, NFIA, calculated as factor income received from abroad minus factor income paid abroad, is added to domestic income to obtain national income.

National income is obtained by adding net factor income from abroad to domestic income. NFIA equals factor income received from abroad minus factor income paid abroad: ₹620 crore − ₹780 crore = −₹160 crore. Thus, national income = ₹8,250 crore − ₹160 crore = ₹8,090 crore. Since payments abroad exceed receipts, the adjustment is negative, so option C is correct.

In conventional national-income accounting, unpaid household services performed by family members for their own household are generally excluded from measured production. They do not have an observable market transaction or a reliable market price, and including them would make measurement inconsistent across households. If the same cooking service is provided by a paid domestic worker or a restaurant, its market value is included. Therefore, option A is correct.

The resale value of an old house is not current production because the house was produced and counted when it was originally constructed. However, the property broker performs a current-year brokerage service, and the fee is payment for that newly produced service, so it is included in domestic product. An old-age pension is a transfer payment, while share purchases are financial transactions; neither represents current production. Therefore, option B is correct.

A new server computer is a durable capital asset that provides productive services for more than one accounting period, so it is classified as fixed capital formation. An internet data pack is a service consumed during the current production period and does not normally provide a durable asset. It is therefore treated as intermediate consumption. Hence, the correct classification is given in option A.

Laboratory chemicals are goods consumed during the provision of the school’s educational service, so they are intermediate consumption. Teachers’ salaries are payments for the labour services used in producing education. They are therefore factor income and form part of the value added generated by the school. Since the two items have different economic roles, option A gives the correct treatment.

Under the value-added method, the value of the final product equals the sum of value added at every stage of production. The value added before the final seller is ₹1,20,000 + ₹1,75,000 + ₹2,10,000 + ₹95,000 = ₹6,00,000. Therefore, the final seller’s value added is ₹8,40,000 − ₹6,00,000 = ₹2,40,000. This prevents double counting of intermediate goods.

The value of current production is not always equal to the value of sales because some goods may remain unsold or may come from opening inventories. Current output is adjusted by adding the change in inventories, calculated as closing stock minus opening stock. If this adjustment is wrong, output and consequently gross value added are measured incorrectly. It does not automatically affect wages, NFIA, or taxes in the stated manner.

Gross value added becomes net value added when consumption of fixed capital, or depreciation, is deducted. Thus, NVA at market price = ₹18 lakh − ₹2.4 lakh = ₹15.6 lakh. Since no adjustment for net indirect taxes is made, the valuation remains at market prices. Therefore, the resulting measure is NVA at market price, not NVA at factor cost or national income.

Subtracting net indirect tax changes the valuation from market price to factor cost: GVA at FC = ₹18 lakh − ₹1.2 lakh = ₹16.8 lakh. Because depreciation has not been deducted, the measure remains gross rather than net. Therefore, the correct result is GVA at factor cost. Depreciation would have to be deducted additionally to obtain NVA at factor cost.

Non-market government services usually do not have an economically meaningful market price. Their output is therefore valued by the cost of production. The relevant components here are compensation of employees (₹15 crore), intermediate consumption (₹4 crore), and consumption of fixed capital (₹2 crore). Hence, output value = 15 + 4 + 2 = ₹21 crore. The calculation includes all stated production costs.

A capital gain results from a change in the market price of an existing asset, such as land. It does not represent a newly produced good or service during the accounting period. The value-added method measures value created through current production, so a mere increase in an asset’s price is excluded to avoid treating a price change as output.