Posted by Anjali Kaur on Apr 18, 2021

Value Added Method: National Income

Value added, as the name speaks for itself. It reflects the actual contribution by each factors during the production process. This method is popularly used to avoid the problem of double counting. In this post, You will be able to absorb this method in your mind in a simplified way. Let’s learn Value Added Method: National Income.

 Let’s understand this topic in detail.

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Value-added Method

Value-added method or production method is another method to calculate the national income of a country. Under this method, we only add value to a product at every stage of this production. In your exams, you will use this method only when they ask you to calculate the value added by any firm: like firm X, firm Y, etc.

The easiest way to calculate this is by using the following table. Just follow the sequence:

FirmSales + Change in Stock-– Purchases= Value Added
X

This table, or consider this as your formula will be used, where you find the questions on calculating the value added by the firm. I will recommend you to go through the Value of output method link.

Points to be kept in mind

1. If sales are given, that is, sales by firm X, it is considered to be full or total sales.

2. In case sales are mentioned like; sales by firm X to household, then you need to find total sales by using the formula: Sales = Domestic Sales + Exports

3. Change in Stock = Closing Stock – Opening Stock (How to memorise this? It’s easy ‘C’ comes first in alphabets so its Closing stock – Opening stock (Because O comes later in alphabets)

4. Purchases are like the expenditures incurred by the firm, so include all the intermediate purchases or purchase by 1 firm from another.

5. Value added = Sales + Change in Stock – Purchases.

6. Value added will always be a positive number.

Practice

  1. Find out ‘Value Added by Firm B’ from the following data:
ItemsAmount (Rs in lac)
Purchases by firm B from firm A30
Sales by firm B to firm C25
Sales by firm B to households35
Opening stock of firm B5
Opening stock of firm C10
Closing stock of firm B10
Purchases by firm B from firm D15
Exports by firm B20

Solution. Use the formula table and start placing the values from this question in it.

FirmSales + Change in Stock-– Purchases= Value Added
B25 (Sales by firm B to firm C)
35 (Sales by firm B to households)
20 (Exports by firm B)
10 – 5 (Closing stock of B – Opening stock of B)30 (Purchases by firm B from firm A)
15 (Purchases by firm B from firm D)
B25+35+20+ 5– (30+15)
B80+5-45=40

So, the value added by B is 40.

2. Calculate Value Added by Firm A and Firm B from the following data:

ItemsAmount (Rs in crore)
Sales by firm B to the general government50
Total sales by firm A500
Purchases by households from the firm B400
Exports by firm B50
Change in the stock of firm A30
Imports by firm A80
Change in the stock of firm B20
Sales by firm C to firm B200
Sales by firm A to firm B150

Solution. Follow the same table, and fill in the particulars given.

FirmSales + Change in Stock-– Purchases= Value Added
A500 (Total sales are given, no need to write anything else in sales than)+ 30– 80= 450
B50 + 400 + 50+ 20– 200 – 150= 170

I hope it is understandable to you all.

That’s all about value added method calculation under national income.

You can read the more posts by me on national income:

  1. Real and nominal GDP
  2. National income
  3. National income formula list
  4. Value-added method
  5. Income method
  6. Expenditure method

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