Value added method of measuring national income all formulaa
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Value Added Method for Measurement of National Income!
This method is used to measure national income in different phases of production in the circular flow. It shows the contribution (value added) of each producing unit in the production process.
i. Every individual enterprise adds certain value to the products, which it purchases from some other firm as intermediate goods.
ii. When value added by each and every individual firm is summed up, we get the value of national income.
Value added Method is also known as:
(I) Product Method;
(ii) Inventory Method;
(iii) Net Output Method;
(iv) Industrial Origin Method; and
(v) Commodity Service Method.
Concept of Value Added:
Value added refers to the addition of value to the raw material (intermediate goods) by a firm, by virtue of its productive activities. It is the contribution of an enterprise to the current flow of goods and services. It is calculated as the difference between value of output and value of intermediate consumption.
Value Added = Value of Output – Intermediate Consumption
Example of Concept of Value Added:
Suppose a baker needs only flour to produce bread. He purchases flour as inputs worth? 500 from the miller and then by virtue of its productive activities, converts the flour into bread and sells the bread for Rs. 700.
In the given example:
1. Flour is an input (Intermediate goods) and its value of Rs. 500 are termed as value of ‘Intermediate Consumption’.
2. Bread is the Output and its value of Rs. 700 are termed as ‘Value of Output’.
3. Difference between the value of output and intermediate consumption is termed as ‘Value Added’. It means, that the baker has added a value of Rs. 200 to the total flow of final goods and services in the economy.
4. Value added by each producing enterprise is also known as the Gross Value Added at Market price (GVAMP). It means, value added by baker 200) can be termed either as Value added or GVAMP.
5. GDFMP (Gross Domestic Product at Market Price), i.e. ∑GVAMP = GDPMP.
Let us now understand ‘Intermediate Consumption’ and ‘Value of Output’ in detail.
Intermediate Consumption:
Use of intermediate goods in the production process is termed as intermediate consumption and expenditure on them as intermediate consumption expenditure. In the given example, flour is an intermediate good for baker.
For example, flour is an intermediate good as its value is merged in the value of bread. However, any machinery purchased for making bread is not an intermediate good as its value will not be included in the value of intermediate consumption.
Imports are not separately Included:
If value of intermediate consumption is given, then imports are not included separately as imports are already included in the value of intermediate consumption. However, if domestic purchases are specifically mentioned, then imports will also be included.