The Product or Value Added Method

According to the product methodology, we compute the average Yearly or annual value of commodities and services manufactured. Do we sum up the merit value of all commodities and services manufactured by all the enterprises in an economy? The below instance will assist us to comprehend.

For instance, they are the wheat manufacturers and the bakers. The wheat manufacturers grow wheat and they dont want any load apart from the human worker. A portion of the wheat manufactured is sold to the bakers. The bakers dont require any other raw materials apart from wheat to manufacture bread. Let us assume, that in a year the total value of wheat that the farmers have manufactured is 100. Out of this, they have sold 50 worth of wheat to the bakers. The bakers have used this quantity of wheat entirely during the year and have manufactured 200 worth of bread. So, what is the value of total production in the economy? If we follow the simple way of averaging the values of manufacturing or production of the sectors, we would add 200 (value of production of the bakers) to 100 (value of production of farmers). The result will be 300.

Farmer

Baker

Total production

100

200

Intermediate goods used

0

50

Value added

100

200 50 = 150

The terminology that is used to indicate the net contribution made by an enterprise is called its value added. We have seen that the raw materials that enterprise purchases from another enterprise which are entirely used up in the procedure of manufacturing are known as ‘intermediate goods’. Therefore the value added of an enterprise is value of production of enterprise – value of intermediate goods used by the enterprise. The value added of an enterprise is allocated among its 4 factors of production, namely,

  • Labour
  • Capital
  • Entrepreneurship
  • Land

Hence, wages, profits, rents and interest paid out by the enterprise must add up to the value added of the enterprise. Value added is a flow variable.

The above mentioned is the concept that is explained in detail about The Product or Value Added Method. To know more, stay tuned to BYJU’S.