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Methods of calculating national income - Value Added/Product Method
राष्ट्रीय आय की गणना की विधियाँ – मूल्य वर्धित/उत्पाद विधि
In this Class 12 Economics topic from the chapter “National Income and Related Aggregates,” students learn how national income is estimated through the Value Added or Product Method. The topic explains how to measure the value of final goods and services produced by different sectors, calculate value added at each stage of production, and avoid double counting of intermediate goods. It also connects production data with aggregates such as GDP and helps students understand the role of primary, secondary, and tertiary sectors in national income accounting.
Practice questions
01 A firm's total receipts are ₹18,00,000, including ₹1,20,000 from the sale of an old machine and ₹80,000 from a current-year brokerage service. If the remaining receipts are sales of current output, closing stock is ₹50,000 and opening stock is ₹90,000, what is the value of output?
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Answer and explanation
Correct answer: A. ₹16,60,000
Explanation: The old machine is a second-hand asset, so its sale is excluded from current production. The brokerage service is produced during the current year and remains included. Current-output sales are ₹18,00,000 − ₹1,20,000 = ₹16,80,000. Adding the increase or decrease in stock gives value of output = ₹16,80,000 + ₹50,000 − ₹90,000 = ₹16,40,000. Therefore, the correct answer is not represented by the original options; option A has been corrected to ₹16,40,000.
02 If NVA at factor cost (NVA₍FC₎) is ₹12,40,000, depreciation is ₹1,60,000 and net indirect tax is ₹−45,000, what is GVA at market price (GVA₍MP₎)?
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Answer and explanation
Correct answer: A. ₹13,55,000
Explanation: To convert NVA at factor cost into GVA at market price, first add depreciation because gross value includes consumption of fixed capital, and then add net indirect tax. Thus, GVA₍MP₎ = NVA₍FC₎ + depreciation + net indirect tax = ₹12,40,000 + ₹1,60,000 − ₹45,000 = ₹13,55,000. Therefore, option A is correct.
03 In a multistage production process, a farmer’s value added is ₹32,000, a mill’s is ₹18,000, a bakery’s is ₹25,000 and a retailer’s trade margin is ₹15,000. What is the value of the final good?
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Answer and explanation
Correct answer: C. ₹90,000
Explanation: Under the value-added method, the value of the final product equals the sum of value added at every stage of production and distribution. Intermediate sales are not added separately because that would count the same output more than once. Therefore, final-good value = ₹32,000 + ₹18,000 + ₹25,000 + ₹15,000 = ₹90,000, so option C is correct.
04 A factory pays ₹40,000 for outsourced security services. The security company pays guard wages of ₹28,000 and purchases uniforms costing ₹4,000. What is the security company’s GVA at market price (GVA₍MP₎)?
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Answer and explanation
Correct answer: B. ₹36,000
Explanation: The security company’s output is valued at the service fee of ₹40,000. Uniforms are an intermediate input used in providing the service, so they must be deducted. Wages are a payment to a factor of production and are part of the value created, not an intermediate input. Hence GVA₍MP₎ = output − intermediate consumption = ₹40,000 − ₹4,000 = ₹36,000. Option B is correct.
05 If GVA at factor cost (GVA₍FC₎) is ₹6,75,000, product tax is ₹80,000, production tax is ₹30,000 and subsidy is ₹20,000, what is GVA at market price (GVA₍MP₎)?
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Answer and explanation
Correct answer: A. ₹7,65,000
Explanation: Market-price valuation is obtained by adding net indirect taxes to GVA at factor cost. Net indirect tax equals product tax plus production tax minus subsidies: ₹80,000 + ₹30,000 − ₹20,000 = ₹90,000. Therefore, GVA₍MP₎ = ₹6,75,000 + ₹90,000 = ₹7,65,000. The subsidy is subtracted because it lowers the market price relative to factor cost. Hence, option A is correct.
06 If an economy has primary sector NVA at factor cost of ₹1,250 crore, secondary sector NVA at factor cost of ₹1,980 crore, tertiary sector NVA at factor cost of ₹2,770 crore and NFIA of −₹150 crore, what is national income?
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Answer and explanation
Correct answer: B. ₹5,850 करोड़
Explanation: Add the net value added at factor cost of all three sectors to obtain domestic income: ₹1,250 crore + ₹1,980 crore + ₹2,770 crore = ₹6,000 crore. Then add NFIA to convert domestic income into national income. Since NFIA is negative, national income = ₹6,000 crore + (−₹150 crore) = ₹5,850 crore. Therefore, option B is correct.
07 A firm mistakenly added the sale of an old machine worth ₹2,00,000 to value of output and omitted a brokerage service worth ₹20,000. What is the net correction to value of output?
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Answer and explanation
Correct answer: A. Deduct ₹1,80,000
Explanation: The sale of an old machine is not current production; it is a transaction in an existing asset, so ₹2,00,000 must be removed from the incorrectly calculated output. Brokerage is a current service and should be included, so ₹20,000 must be added. Net correction = −₹2,00,000 + ₹20,000 = −₹1,80,000. Thus, the reported value of output must be reduced by ₹1,80,000.
08 If depreciation is deducted from GVA at market prices but net indirect tax is not deducted, which measure is obtained?
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Answer and explanation
Correct answer: A. NVA at market prices (NVA₍MP₎)
Explanation: GVA at market prices is a gross measure because it includes depreciation, and it is valued at market prices because it includes net indirect taxes. Subtracting only depreciation changes the measure from gross to net, but it remains at market prices. Hence, the result is NVA at market prices. Net indirect tax must also be subtracted to obtain NVA at factor cost.
09 A foreign-owned factory operating within domestic territory generates NVA at factor cost of ₹300 crore. In the production method, where is this amount first included?
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Answer and explanation
Correct answer: A. Domestic income
Explanation: Domestic income is based on the location of production, whereas national income is based on the ownership or normal residence of production factors. Because the factory operates within the domestic economic territory, its production and value added are first included in domestic income. The income attributable to foreign factors may later be considered while moving from domestic income to national income through the relevant foreign-income adjustment.
10 Under the value added method, how is commission earned by a property broker in the current year on the sale of an old house treated?
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Answer and explanation
Correct answer: A. As the value of brokerage service provided in the current year
Explanation: The old house itself was produced in an earlier year, so its entire resale value is not counted again in current national output; doing so would cause double counting. However, the broker provides a new economic service in the current year. The commission is therefore included as the current year's output and value added of brokerage services. It is not a transfer payment because it is received in exchange for a service.
Explanation: To convert GVA at market prices into NVA at factor cost, two adjustments are required. First, subtract depreciation to change the gross measure into a net measure. Second, subtract net indirect tax, which equals product tax minus product subsidy, to move from market prices to factor cost. Therefore, NVA₍FC₎ = GVA₍MP₎ − Depreciation − (Product tax − Product subsidy).
12 A firm’s GVA at market prices (GVAₘₚ) is reported as ₹10,00,000. If wages of ₹2,00,000 were mistakenly included in intermediate consumption and deducted, what should the correct GVAₘₚ be?
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Answer and explanation
Correct answer: A. ₹12,00,000
Explanation: GVA at market prices is calculated as the value of output minus intermediate consumption. Wages paid to workers are factor payments and form part of the income generated by production; they are not purchases of intermediate goods or services. Since ₹2,00,000 of wages was wrongly deducted as intermediate consumption, that amount must be added back to the reported figure: ₹10,00,000 + ₹2,00,000 = ₹12,00,000. Thus, option A is correct.
13 A producer’s total output is ₹25,00,000, NVA at factor cost (NVA_FC) is ₹11,40,000, depreciation is ₹1,60,000, and net indirect taxes are ₹70,000. What is intermediate consumption?
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Answer and explanation
Correct answer: A. ₹11,30,000
Explanation: First convert NVA at factor cost into GVA at market prices: GVA_MP = NVA_FC + depreciation + net indirect taxes = ₹11,40,000 + ₹1,60,000 + ₹70,000 = ₹13,70,000. Since GVA_MP = output − intermediate consumption, intermediate consumption is ₹25,00,000 − ₹13,70,000 = ₹11,30,000.
14 If the total value of final goods and the sum of value added at all stages are different in an economy, what is the most likely reason?
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Answer and explanation
Correct answer: A. An error in classifying intermediate goods or in making the stock adjustment
Explanation: Under the value-added method, the value of final goods should equal the sum of value added created at every stage, provided the accounting period, prices, and coverage are consistent. If the figures differ, the usual causes include counting intermediate goods as final goods, omitting an intermediate transaction, or recording inventories and stock changes incorrectly. Therefore, an error in classification or stock adjustment is the most likely explanation, making option A correct.
15 What is the biggest measurement problem due to illegal or informal production in the value added method?
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Answer and explanation
Correct answer: A. Incomplete and unreliable data
Explanation: Illegal and informal activities are often unregistered, cash-based, or deliberately concealed. Consequently, production, sales, input costs, and incomes may not appear in official records. The value added method therefore faces incomplete, underreported, and potentially unreliable data, making estimation difficult. The formulas still exist, intermediate consumption remains relevant, and taxes do not automatically become zero.
16 If a firm's GVA at market prices is known and it must be converted to national income, why is adding only that firm's NFIA not sufficient?
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Answer and explanation
Correct answer: A. Because first NVA at factor cost of all sectors must be summed to form domestic income
Explanation: National income is an economy-wide aggregate, not the income of one firm. A single firm’s GVA at market prices must first be adjusted for depreciation and net indirect taxes to obtain its NVA at factor cost, and the NVA at factor cost of all domestic sectors must then be aggregated. Only after obtaining domestic factor income is NFIA added to move from domestic to national income.
17 In an expert-level numerical question, what is the safest sequence to calculate NVA at factor cost?
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Answer and explanation
Correct answer: A. First value of output, then GVA at market prices, then NVA at market prices, then NVA at factor cost
Explanation: The safest procedure is to classify every item first, calculate the value of output, and subtract intermediate consumption to obtain GVA at market prices. Then subtract depreciation to obtain NVA at market prices, and subtract net indirect taxes to obtain NVA at factor cost. This sequence prevents confusion between stocks, inputs, factor payments, depreciation, and taxes.
18 If a firm's sales are ₹18,40,000, closing stock ₹2,80,000, opening stock ₹3,25,000, own-use finished goods ₹75,000 and intermediate consumption ₹9,60,000, what is GVA at market prices?
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Answer and explanation
Correct answer: A. ₹9,10,000
Explanation: First calculate the value of output: sales + change in stock + own-use production = ₹18,40,000 + (₹2,80,000 − ₹3,25,000) + ₹75,000 = ₹18,70,000. GVA at market prices equals value of output minus intermediate consumption, so ₹18,70,000 − ₹9,60,000 = ₹9,10,000. Therefore, option A is correct.
19 A producing unit has GVA at market prices ₹13,50,000, depreciation ₹1,80,000, product tax ₹1,40,000, production tax ₹60,000 and total subsidies ₹90,000. What is NVA at factor cost?
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Answer and explanation
Correct answer: A. ₹10,60,000
Explanation: Net indirect tax equals product tax plus production tax minus subsidies: ₹1,40,000 + ₹60,000 − ₹90,000 = ₹1,10,000. To convert GVA at market prices into NVA at factor cost, subtract depreciation and net indirect tax: ₹13,50,000 − ₹1,80,000 − ₹1,10,000 = ₹10,60,000. Hence option A is correct.
20 If a firm wrongly included wages of ₹3,20,000 in intermediate consumption and calculated GVA at market prices as ₹8,40,000, what is the correct GVA at market prices?
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Answer and explanation
Correct answer: B. ₹11,60,000
Explanation: GVA is calculated as value of output minus intermediate consumption. Wages are factor payments and must not be included in intermediate consumption. Because the firm wrongly deducted ₹3,20,000 as an input, its reported GVA is understated by that amount. Correct GVA = reported GVA + wrongly deducted wages = ₹8,40,000 + ₹3,20,000 = ₹11,60,000.
21 A firm's total receipts are ₹24,00,000 including ₹2,50,000 sale of an old asset and ₹70,000 current-year repair service income. If closing stock is ₹1,10,000 and opening stock is ₹1,60,000, what is the value of output?
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Answer and explanation
Correct answer: B. ₹22,00,000
Explanation: Receipts from selling an old asset are capital receipts and do not represent current production, so ₹2,50,000 is excluded. Current-year repair service income is part of output and remains included. Adjusting for inventory change gives value of output = (₹24,00,000 − ₹2,50,000) + (₹1,10,000 − ₹1,60,000) = ₹22,00,000.
22 If NVA at factor cost (NVA₍FC₎) is ₹9,30,000, depreciation is ₹1,25,000 and net indirect tax is ₹−35,000, what is GVA at market price (GVA₍MP₎)?
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Answer and explanation
Correct answer: B. ₹10,20,000
Explanation: To convert NVA at factor cost into GVA at market price, first add depreciation to change net value into gross value and then add net indirect tax to change factor cost into market price: GVA₍MP₎ = NVA₍FC₎ + depreciation + NIT. Thus, ₹9,30,000 + ₹1,25,000 − ₹35,000 = ₹10,20,000. The negative NIT reduces the final amount.
23 A value of output wrongly includes ₹3,40,000 sale of an old machine and omits ₹55,000 current-year installation service. What is the net correction for correct value of output?
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Answer and explanation
Correct answer: A. Deduct ₹2,85,000
Explanation: The sale of an old machine must be removed because it is a resale of an asset produced in an earlier year, not current production. The installation service must be added because it is a service provided during the current year. Thus, net correction = −₹3,40,000 + ₹55,000 = −₹2,85,000. The reported value of output must therefore be reduced by ₹2,85,000, making option A correct.
24 If the output value includes product tax and the producer receives a subsidy separately, what is the correct adjustment for finding GVA at factor cost?
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Answer and explanation
Correct answer: A. Deduct net indirect tax
Explanation: GVA at market prices includes the effect of product taxes and excludes the beneficial effect of subsidies in the usual valuation framework. To convert it to GVA at factor cost, net indirect tax is deducted. Net indirect tax equals indirect taxes minus subsidies, so the equivalent operation is to deduct taxes and add subsidies. Depreciation, intermediate consumption, and NFIA are unrelated to this particular valuation adjustment.
25 If sales are ₹42 lakh, closing stock is ₹7 lakh, opening stock is ₹9 lakh, intermediate consumption is ₹18 lakh and depreciation is ₹3 lakh, what is NVA at market price?
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Answer and explanation
Correct answer: A. ₹19 lakh
Explanation: First calculate the value of output by adjusting sales for the change in stock: ₹42 lakh + ₹7 lakh − ₹9 lakh = ₹40 lakh. Gross value added at market price is ₹40 lakh − ₹18 lakh = ₹22 lakh after deducting intermediate consumption. Finally, deduct depreciation of ₹3 lakh to obtain NVA at market price: ₹22 lakh − ₹3 lakh = ₹19 lakh. Hence, option A is correct.
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