The value-added method is one of the three methods of determining national income. The other two methods being the expenditure method and income method.
The value-added method is also known as product method or output method, and its primary objective is calculating the national income by taking into account the value added to a product during the various stages of production.
To determine the national income using this method, the first step involves calculating the net value added at factor cost (NVAfc). Calculating NVAfc requires net indirect taxes to be deducted.
This method of calculating national income arranges the economy into different categories of industries such as transportation, fishing, agriculture, communication etc.
As this method focuses on net value addition by each of the components in production, therefore the following elements should be excluded or subtracted from the output of the enterprise.
- Raw materials consumption
- Capital consumption
- Net Indirect Taxes
Also Read: What is Circular Flow of Income?
Steps of Computing National Income
Step 1: Identification and classification of producing units
Identify all the producing units in the domestic economy and classify them into the primary, secondary and tertiary sector.
Step 2: Estimation of Gross Value Added of each sector
Gross Value Added (GVA) = Value of Output-Intermediate Consumption
Step 3: Estimation of GDP
Then add GVA of all the three sectors, Primary, Secondary and Tertiary to get GDP of the economy.
Step 4: Estimation of National Income
Finally to compute National Income (NNPfc) from GDPMP
– Net factor income from abroad(NFIA) is added,
– Depreciation is subtracted and
– Net Indirect Taxes are also deducted.
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.