The value added method is one of the three methods to determine national income. The other two methods are the expenditure method and income method.
It is also known as product method or output method, and its primary objective is to calculate the national income by taking the value added to a product during the various stages of production into account.
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 the 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, hence 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 to Compute 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, i.e., primary, secondary, and tertiary, to get the GDP of the economy.
Step 4: Estimation of national income
Finally, to determine the national income (NNPfc) from GDPMP,
– Net factor income from abroad (NFIA) is added,
– Depreciation is subtracted, and
– Net indirect taxes are also deducted
The formula is as follows:
NNPFC = GDPMP – Depreciation + Net factor income from abroad – Indirect taxes + subsidies
The above-mentioned is the concept that is explained in detail about ‘The Product or Value Added Method’. To know more, stay tuned to our website.