Question

Discuss the value added method of measuring national income. What problems are
faced in its estimation?
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Answer 1

Explanation:

Product or value added method is a way of computing national income of a country. This system is also known as output or inventory method. This method calculates national income by adding value to a product at every stage of its production.

Three ways to calculate national income are :

1) product method or value added method

2) income method

3) expenditure method

Difficulties in measuring national income are :

1) lack of reliable data - the reliability of data relating to national income estimation is often questioned (in India)

2) existence of Non-monetised sector

3) Difficulties in classification of working population

4) illegal income

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Answer 2

The value-added method is the process to determine the country's national income by the introduction of a commodity at every production stage.

• Value-added method is used to compute the national income in the circular flow at various phases of production.
• The method shows the contribution or the added value of each unit produced in the process of production.
• Every business contributes some value to the items that it purchases as intermediate goods from some other organization. If every single company adds up the value-added, then the value of national profits is ascertained.
• The problems faced in the estimation of national income are -

1. Depreciation of asset value
2. The issue of double counting
3. Depreciation of assets
4. Determination of which category of commodities to be included or excluded.
5. Exclusion of transfer payments and the capital gains
6. Illegal activities such as betting, gambling or hoarding of goods.