Question

Answer in detail:

Explain the Output method of measuring National income.

Answer 1

Output Method: This method measures the national income either, by taking the market value of final goods and services produced in an economy during an accounting year, or by estimating the contribution made by each of the producing units in the economy to the total production within the domestic territory during an accounting year. There are two methods of measuring national income by the output method.

i. The final goods method: This method measures the national income by taking the market value of final goods and services produced in an economy during an accounting year.
ii. The value added method: The value added method measures the national income by estimating the contribution made by each of the producing units in the economy to the total production within the domestic territory during an accounting year.

This can be understood by the following example:

Production stages	Value of input	Value of output	Value added
Milk(farmer)	0	400	400
Cheese(dairy)	400	800	400
Sweets(shopkeeper)	800	1200	400
Total value	1200	2400	1200

Here, we have assumed that there is only one final product (sweets) and there are three stages of production i.e. there is milk, cheese and sweets. Also, it is assumed that milk is the only input in the production of cheese and cheese is the only input in the production of sweets.

As the final value of sweets produced is Rs 1200, national Income is Rs 1200.The value added at every stage can also be summed up to get national income. Value added (value of output- value of input) by the farmer is Rs 400 (400 − 0). Value added by the dairy is Rs 400 (800−400). Value added by the shopkeeper is Rs 400(1200−800). Sum of all the values added also gives Rs 1200(400+400+400).

Thus, national income as per the above example is Rs 1200.