The Product or Value Added Method

Value-Added Method:

The value-added method of calculating national income focuses on the value added to a product at each stage of production. To calculate the national income using this method, we will have first to calculate the net value added at factor cost (NVAfc). And to calculate the (NVAfc), we will have to deduct the net indirect taxes.

Usually, this method involves dividing the economy into various industries such as agriculture, fishing, transport, communication, and so on.

This method concentrates on the net value added by each component; we would need to exclude or subtract the following elements from the output of each enterprise:

  • Consumption of raw materials
  • Consumption of capital
  • Net indirect taxes

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.