*DAY #07 & 08 02 & 03.04.2020*
*TOPIC – NATIONAL
INCOME CALCULATION*
*VALUE ADDED METHOD/PRODUCT METHOD *
1. VALUE
ADDED / OUTPUT / PRODUCTION METHOD:
This method is also called the value-added method. This
method approaches national income from the output side. Under this method, the
economy is divided into different sectors such as agriculture, fishing, mining,
construction, manufacturing, trade and commerce, transport, communication and
other services. Then, the gross product is found out by adding up the net
values of all the production that has taken place in these sectors during a
given year.
In
order to arrive at the net value of production of a given industry,
intermediate goods purchase by the producers of this industry are deducted from
the gross value of production of that industry. The aggregate or net values of
production of all the industry and sectors of the economy plus the net factor
income from abroad will give us the GNP. If we deduct depreciation from the GNP
we get NNP at market price. NNP at market price – indirect taxes + subsidies
will give us NNP at factor cost or National Income.
The output method can be used where there exists a census
of production for the year. The advantage of this method is that it reveals the
contributions and relative importance and of the different sectors of the
economy
Value
of Output:
Value
of output refers to market value of all goods and services produced during a
period of one year.
How
to Measure the Value of Output?
(i)
When the entire output is sold in an accounting year, then: Value of Output =
Sales
(ii)
When the entire output is not sold in an accounting year, then the unsold stock
is added to the value of sales. Unsold stock is the excess of closing stock
over opening stock and is termed as ‘Change in Stock’.
It
means, Value of Output = Sales + Change in Stock, Where, Change in stock =
Closing stock – Opening stock
One
More way to Calculate Value of Output:
Value
of Output can also be calculated as: Value of Output = Quantity x Price For
example, if a firm manufactures 1,000 pairs of shoes annually and sells them @
Rs 500 per pair, then: Value of Output = 1,000 x 500 =Rs 5, 00,000
Exports
are not separately Included:
Like
imports, exports are also not separately included in value of output if ‘Sales’
are given (and domestic sales are not specifically mentioned). In case of an
open economy, sales include both domestic sales and exports.
Let
us understand this:
Calculate
Value of Output:
Case
1:
(i)
Sales = Rs 2,000;
(ii)
Exports = Rs 400
Value
of Output = Rs 2,000 As exports are already included in the value of sales
Case
2:
(i)
Domestic Sales = Rs 700;
(ii)
Exports= Rs 200
Value
of Output = Rs 700 + Rs 200 = Rs 900 Exports are included as domestic sales are
specifically mentioned.
Before
we proceed with the steps needed to estimate national income, let us first
group the various production units into distinct industrial groups or sectors.
It is done because it is easier to estimate national income of a group of
similar production units as compared to estimating for each production unit
separately
INTERMEDIATE CONSUMPTION:
Use
of intermediate goods in the production process is termed as intermediate
consumption and expenditure on them as intermediate consumption expenditure. In
the given example, flour is an intermediate good for baker.
For
example, flour is an intermediate good as its value is merged in the value of
bread. However, any machinery purchased for making bread is not an intermediate
good as its value will not be included in the value of intermediate
consumption.
IMPORTS ARE NOT SEPARATELY
INCLUDED:
If
value of intermediate consumption is given, then imports are not included
separately as imports are already included in the value of intermediate
consumption. However, if domestic purchases are specifically mentioned, then
imports will also be included.
STEPS
OF VALUE ADDED METHOD:
The
main steps for estimating national income by Value Added Method are:
Step
1: Identify and classify the
production units:
·
Identify and classify the production units.
Step
2: Estimate Gross Domestic Product at Market Price:
·
In the
second step, Estimate Gross Domestic product at Market Price ƩGVAMP
= GDPMP. (by adding Value Added at market price of all sectors)
Step
3: Calculate Domestic Income (NDPFC):
·
Calculate
Domestic Income ( NDPFC) = NDPFC = GDPMP – Depreciation
– Net Indirect Tax i.e. NDPFC = GDPMP – Depreciation – Net Indirect Taxes.
Step
4: Estimate net factor income from abroad (NFIA) to arrive at National Income:
·
In the final step, Estimate net factor income
from abroad (NFIY) to arrive at National Income. (NNPFC) = NDPFC + NFIA
CALCULATION -
GVAMP
of Primary Sector
+ GVAMP
of Secondary Sector
+ GVAMP
of Tertiary Sector
= Gross
Domestic Product at Market Price (GDPMP)
(-) Depreciation
= Net
Domestic Product at Market Price (NDPMP)
(-) Net
Indirect Tax
= Net
Domestic Product at Factor Price (NDPFC)
(+) Net
factor Income from Abroad
= Net
National Product at Factor Price (NNPFC)
Value
Added = Value of Output – Intermediate
Consumption
Value
of Output = Sales
Value
of Output = Sales + Change in Stock
Value
of Output = Domestic Sales + Export + Change in Stock (if
Given)
(Machinery are always final goods when calculated
Value Added)
Precautions
of Value Added Method:
The
various precautions to be taken in Value Added Method are:
1.
Intermediate Goods are not to be included in the national income since such
goods are already included in the value of final goods. If they are included
again, it will lead to double counting.
2.
Sale and Purchase of second-hand goods is not included as they were included in
the year in which they were produced and do not add to current flow of goods
and services.
However,
any commission or brokerage on sale or purchase of such goods will be included
in the national income as it is a productive service.
3.
Production of Services for self-consumption (Domestic Services) are not
included. Domestic services like services of a housewife, kitchen gardening,
etc. are not included in the national income since it is difficult to measure
their market value. These services are produced and consumed at home and never
enter the market place and are termed as non-market transactions.
It
must be noted that paid services, like services of maids, drivers, private
tutors, etc. should be included in the national income.
4.
Production of Goods for self-consumption will be included in the national
income as they contribute to the current output. Their value is to be estimated
or imputed as they are not sold in the market.
5.
Imputed value of owner-occupied houses should be included. People, who live in
their own houses, do not pay any rent. But, they enjoy housing services similar
to those people who stay in rented houses. Therefore, value of such housing
services is estimated according to market rent of similar accommodation. Such
an estimated rent is known as imputed rent.
6.
Change in stock of Goods (inventory) will be included. Net increase in the
stock of inventories will be included in the national income as it is a part of
capital formation
PRECAUTIONS IN SHORT-
(1) Intermediate Goods are not to be
included in N.I.
(2) Sale and Purchase of second hand
goods is not included.
(3) Production of services for self
consumption (Domestic Services) is not included.
(4) Production of Goods for self
consumption is included.
(5) Imputed value of owner occupied
houses should be included.
(6) Change in stock of Goods (inventory)
will be included
EXERCISE QUESTIONS / NUMERICALS
1. From the following about firm ‘X’, calculate
Gross Value Added at Factor Cost by it:
Items (in thousand)
(i)
Sales 500
(ii)
Opening stock 30
(iii)
Closing stock 20
(iv)
Purchase of intermediate products 300
(v)
Purchase of machinery 150
(vi)
Subsidy 40
SOLUTION.
Gross
Value Added at Factor Cost by Firm X
= Sales
+ Change in stock (Closing stock – Opening stock) + Subsidy – Purchase of
intermediate products
= 500 thousand + ( 20 thousand – 30 thousand) + 40 thousand – 300 thousand
= 500
thousand – 10 thousand + 40 thousand – 300 thousand
= 230 thousand
Ans. Gross value added at factor cost by firm X = 230 thousand.
2. From the following about firm ‘Y’, calculate
Net Value Added at Market Price by it:
Items ( in thousand)
(i)
Sales 300
(ii)
Depreciation 20
(iii)
Net indirect taxes
30
(iv)
Purchase of intermediate products 150
(v)
Change in stock (-)10
(vi)
Purchase of machinery 100
SOLUTION.
Net Value Added at Market Price by Firm Y
= Sales
+ Change in stock – Purchase of intermediate products – Depreciation
= 300
thousand + (–) 10 thousand – 150 thousand – 20 thousand
= 120 thousand
Ans. Net value added at market price by firm Y = 120 thousand.
3. From the following data calculate value added by firm X and by firm
Y:
(i) Closing stock of firm X. 20
(ii) Closing stock of firm Y. 15
(iii) Opening stock of firm Y 10
(iv) Opening stock of firm X 5
(v) Sales by firm X 300
(vi) Purchases by firm X from
firm Y 100
(vii) Purchases by firm Y from
firm X 80
(viii) Sales by firm Y 250
(ix) Import of raw material by
firm X 50
(x) Exports by firm Y 30
SOLUTION:
V.A. by X = v + i – vi –
ix
= 300 + 20 – 100 – 50
= Rs. 165 lakhs
V.A. by Y = viii + ii –
iii – vii
= 250 + 15 – 10 – 80
= Rs.
175 lakhs
4. From the following data, calculate “gross value added at factor
cost.”
Rs. (in
lakhs)
(i) Sales 180
(ii) Rent 5
(iii) Subsidies 10
(iv) Change in stock 15
(v) Purchase of raw materials 100
(vi) Profits 25
SOLUTION –
GVAfc = i + iv - v + iii
= 180 + 15 – 100 + 10
= Rs. 105 lakhs.
5. From the following data, calculate “gross value added at factor
cost.”
Rs. (in lakhs)
(ii) Purchase of intermediate
products 120
(iii) Purchase of machines 300
(iv) Sales 250
(v) Consumption of fixed
capital 20
(vi) Change in stock 30
SOLUTION -
GVAfc = iv + vi – ii –i
= 250 + 30 – 120 - 20
= Rs. 140 lakhs.
6. From the following information about firm.’X’,calculate net value
added at factor cost:
Items (in lakhs)
1. Purchase of raw materials 500
2. Gross capital formation 200
3. Subsidies 60
4. Open stock 50
5. Sales 800
6. Net capital formation 180
7. Closing stock 40
SOLUTION –
NVAfc = sales -
purchase of raw materials + change in stocks - depreciation+subsidies
= 800-500+(40-50)-(200-180)+60
= 330 lakhs
7. Calculate gross fixed capital formation from the following data :
Items (in
crores)
1. Private final consumption
expenditure 1000
2. Government final
consumption expenditure 500
3. Net exports -50
4. Net factor income from
abroad 20
5. Gross domestic product at
market price 2500
6. Opening stock 300
7. Closing stock 200
SOLUTION –
NVAfc = gross domestic
product at market price – private final consumption expenditure – government
final consumption expenditure – net exports – closing stock + opening stock
= 2500-1000-500+50-200+300
= 1150
8. Calculate
‘Gross value added at market price’ from the following data
(Rs. in lacs)
(i) Import of
raw Material 25
(ii) Sales in
the domestic market 250
(iii)
Deprecation 15
(iv) Export 50
(v) Opening
stock 20
(vi) Purchase of
Raw material 150
(vii) Closing stock 30
SOLUTION -
GDPmp =
ii + iv +(vii-v) –vi
=
250 + 50 + (30-20) – 150
=
300 + 10 – 150
=
310 – 150
=
160
Let us understand this through following more cases:
Calculate Intermediate Consumption in the
following cases:
Case 1:
(I) Intermediate Consumption =Rs. 1,200;
(ii) Imports =Rs 300
Intermediate Consumption = Rs 1,200
As imports are already included in the value
of intermediate consumption.
Case
2 : (i) Purchase of raw material from domestic firm =Rs 500;
(ii)
Imports=Rs 100
Intermediate
Consumption = Rs 500 + Rs 100 = 600
Imports
are included as it is specifically mentioned that purchase of raw material is
from domestic firm
Case
3:
(i)
Purchase of raw material =Rs 1,000;
(ii)
Imports Rs 200
Ans.
Intermediate Consumption =Rs 1,000
Imports
are not included as total purchase of raw material is given.
QUESTIONS
AND ANSWERS – 1 MARK
1. Match the following:
(1) Sum total of all factor payments
|
(I) Product method
|
(2) Aggregate value of final goods and
services produced by all the firms.
|
(II) Income method
|
(3) Aggregate value of spending that
the firms receive for the final goods and services which they produce.
|
(III) Expenditure method
|
2. The sum of final expenditure in the
economy must be equal to ________. (Fill in the blanks)
3. In _________ method we calculate the
aggregate value of all final goods and services produced by all the firms
within the domestic territory of the country in a year. (Fill in the blanks)
4. Looking at the demand side of the
final goods and services to calculate the GDP is referred to as
the_____________. (Expenditure method / Income method / Output Method) (Choose
the correct option)
5. Value
added refers to-
(a)
Production of durable goods
(b)
Output- Intermediate consumption
(c) Production
of non-durable goods
(d) Expenditure on intermediate goods
Ans. b) Output- Intermediate consumption
6. Goods
purchased for satisfaction of wants are
a. Capital goods
b. final goods.
c. consumption goods.
d. Intermediate goods
Ans. b. Final goods
7. Value
of output is equal to:
a. Sales +change in stocks
b. Sales +closing Stock
c. Sales + opening stock
d. Sales - Opening Stock
Ans. a. Sales + Change in Stock
8. Define
intermediate goods.
Answer - These are those goods which are within the boundary line
of production and not ready for use by their final users. These goods are
purchase for future sale or used as raw material.
9. What
is intermediate consumption?
Answer
- Intermediate consumption is expenditure
incurred on intermediate inputs which are used in the process of production.
10. Define
gross investment.
Answer - It refers to the expenditure by the producers on purchase
of all such goods which add to their stock of capital.
11. If the value of output of a firm is Rs. 200 and its
purchase of raw material and machinery (For its own use) are Rs.30 and Rs.50,
respectively then the value added by the firm is-
(a) 230
(b) 170
(c) 150
(d) 120
Ans. (d) 120
12. As
a result of double counting national income is
a) Overestimated
b)
Under estimated
c)
Correctly
d) Not
estimated for the entire year of accounting
Ans. a) Over estimated
13. Production
of defence goods is a limitation of GDP as an index of social welfare. How?
Answer- Production of defence goods is a limitation of GDP as an
index of social welfare. Because defence goods do not make any direct
contribution to the welfare of the individuals and households of a country.
14. Should
we treat subsidies to the producers as transfer payments?
Answer: No, subsidies to the producers should not be treated as
transfer payments. Transfer payments are those payments which there are no
value addition in the economy like scholarship to the students. In the case of
subsidies value addition has already occurred.
15. Machine
purchased is always a final good‘ do you agree? Give reason for your answer.
Answer - Whether machine is a final good or not depends on how it
is being used (end use). If machine is bought by a household, then it is a
final good. If machine is bought by a firm for its own use, then also it is a
final good. If the machine is bought by a firm for resale then it is an
intermediate good
Video #11
National Income Calculation - VALUE ADDED METHOD
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Regards
Dr. Asad Ahmad
KV IIM, Lucknow
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