 Posted by Anjali Kaur on Aug 06, 2020 # Value Added Method of National Income

There are 3 main methods for calculating National Income; Value-added method, Income method, and the Expenditure method. Today, I will be explaining the value-added method but To understand this method of national income, you all must revise: national income meaning, stock and flow concepts, gross and net investment, circular flow of income, formulas, and tricks of solving basic conversion numerical on national income. If you are thorough with the basics of national income, then let’s understand the first method: Value-added method of national income. Good luck!

## What is the value added method of national income?

First of all, there are alternative names used for this method which are product method, and output method. According to the value-added method, domestic income is calculated as a domestic product. Where domestic product stands for Gross Value Added at market price or Gross Domestic Product at market price. The GDPmp is calculated as the total of value added by all the producing units within the domestic territory of the country, during an accounting year. It’s okay if you didn’t understand. You can read the below formula explanation to clarify it.

## Formulas of Value Added Method

Look at the below image, you can download or write it down somewhere. You need to memorize these formulas of value-added methods. This image contains all the possible formulas that I came across since my 8 years of teaching experience. Let’s have a look.

In the box above, you can see the alternative names used to confuse students. Just memorize them to avoid getting trap in your exams. I would be explaning this method with some solved numericals. As it will clarify how to put these formulas into usage.

## Solved Numericals on Value Added Method

Q1 Find GDPmp:

Solution:

For solving this question, we need to calculate GDPmp for each economic sectors:

• Primary Sector: GDPmp = VOO- IC,

GDPmp = 2000-1000 = 1000

• Secondary Sector, GDPmp = VOO-IC

GDPmp = 1800-800 = 1000

• Tertiary Sector, GDPmp = VOO-IC

GDPmp = 1400-600 = 800

• Final GDPmp = GDPmp of each economic sectors: 1000+1000+800 = 2800 (In rupees)

Q2 Find out the Value added by B:

Solution:

Value Added of B = Sales of B + Change in Stock of B – Purchases by B

Tip: Whenever value added is asked use the above formula to avoid any mistakes.

Sales of B = Sales By B to C + Sales by B to Household + Exports by B = 25+35+20 = 80

Change in the stock of B = Closing Stock of B – Opening Stock of B = 10-5 = 5

Purchases by B = Purchase by B from A + Purchase by B from D = 30 + 15 = 45

So, Value Added of B = 80 + 5 – 45 = 40

Q3 Find GVAfc:

Solution:

Lets go step by step

We need GVAfc which is the same as GDPfc. From Value added method, we get GDPmp:

Tip: Write all the formulas and try filling each formula with the given information to solve this problem

GDPmp= VOO- IC

GDPmp = 490 – 300= 190  (Purchasing machinery is a final good, so only purchase of the intermediate product will come here)

VOO = Sales + Change in the stock

VOO = 500 +(-10) = 490

Change in stock = Closing – Opening stock = 20-30 = -10

Tip: Try solving from the end, I first calculated change in stock, then I moved up and solved for value of output and in the end, I solved for GDPmp.

In the question they have asked to solve GDPfc;

GDPfc= GDPmp – Net Indirect Taxes

GDPfc = 190 – ( IT- Subsidies) = 190 – (0-40) = 230

So, GDPfc = 230

Q4 Find NVAfc:

Solution:

Write the formulas for the value-added method:

GDPmp = VOO- IC

GDPmp = 500 – 300 (IC and purchase of raw material are same, refer formula list)

GDPmp = 200

NVAfc = NDPfc

Find NDPfc with basic conversion method:

NDPfc = GDPmp – NIT – Consumption of fixed capital(also known as depreciation)

NDPfc = 200 – (Indirect Taxes – Subsidies) – 10

NDPfc = 200 – (50 – 0)*- 10 = 140

*Indirect Taxes = Export duty + Import Duty = 30 + 20 = 50 ( Refer Formula list)

Q5 Find Value of output:

Solution:

Write all the formulas:

Note: First calculate GDPmp, then use that value to find VOO from the value-added method:

GDPmp = VOO-IC

175 = VOO – 100

VOO = 175 + 100 = 275

VOO = Sales + Change in the stock (This formula is not used in this question).

GDPmp = NDPfc + NIT + Depreciation

GDPmp = 150 + ( Excise duty – subsidy)* + replacement cost of capital

GDPmp = 150 + 15+ 10 = 175

* Excise duty is an indirect tax and replacement cost of capital is the same as depreciation.

Q6 Find Intermediate consumption:

Solution:

Write all the formulas, but first, calculate GDPmp from NVAfc given in the question:

GDPmp = NDPfc + NIT + Depreciation

GDPmp = 100 + (Sales tax – subsidy) + 20

GDPmp = 100 + 10 + 20 = 130

GDPmp = VOO – IC

130 = 220 – IC

130 + IC = 220

IC = 220 – 130

IC = 90

Q7 Find Sales:

Solution:

First find GDPmp:

GDPmp = NDPfc + NIT + Depreciation = 300 + ( IT- subsidies) + 40

GDPmp = 300 + (30-0) + 40 = 370

GDPmp = VOO – IC

370 = VOO – 240

VOO = 370 + 240 = 610

VOO = Sales + Change in stock

610 = Sales + (-60)

Sales = 670

Q8 Find NVAmp:

Solution:

Sales have another formula = Output sold X Price per output

Sales = 1000 x 30 = 30000

First Calculate VOO and then find GDPmp and in the end calculateNDPmp:

GDPmp = VOO – IC

GDPmp = 29500 – 8000 = 21500

VOO = Sales + Change in Stock = 30000 + (-500) = 29500

NDPmp = GDPmp – Depreciation = 21500 – 2000 = 19500

NDPmp = 19500

## Time to Test Yourself

National Income Assignment on Value-added method

Question 1 Calculate sales from the following data:

Question 2. Find NVA at Market price :

Question 3. Calculate NVA at MP:

Question 4. Calculate value of output from the following data:

Question 5. Calculate intermediate consumption from the following items:

Question 6. Calculate net value added at factor cost from the following:

Question 7. Calculate NVA at fc :

Question 8. Calculate sales from the following data:

Question 9. Calculate the firm’s net value added at factor cost:

Question 10. Calculate ‘Value Added by Firm X and Firm Y’ from the following data:

I hope you understood something, if not all. Feel free to drop your valuable feedback and subscribe for more educational content.

Feel free to join my Facebook group meant for economics students.

Photo by Jaredd Craig on Unsplash

### Other posts you might like... Learn with Anjali started because there wasn't an easy-to-consume resource to help students with their studies. Anjali is on single-minded mission to make you successful!