Posted by Anjali Kaur on Aug 06, 2020
Value Added Method

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:

ItemsIn Rupees
Value of output of a primary sector2000
Intermediate consumption of the secondary sector800
Intermediate consumption of the primary sector1000
Net factor income from abroad-30
Net indirect tax300
Value of output of the tertiary sector1400
Value of output of a secondary sector1800
Intermediate consumption of the tertiary sector600

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:

ItemsIn rupees
Purchase By B From A30
Sales By B To C25
Sales By B To Household35
Opening Stock Of B5
Opening Stock Of C10
Closing Stock Of B10
Purchase By B From D15
Exports By B20

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:

ItemsIn rupees
Sales500
Opening stock30
Closing stock20
Purchase of intermediate products300
Purchase of machinery150
Subsidy40

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:

ItemsIn rupees
Purchase of raw material300
Import duty20
Excise duty30
Net addition to stock50
Value of output500
Consumption of fixed capital10

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:

ItemsIn rupees
Net value added at factor cost150
Intermediate cost100
Excise duty20
Subsidy5
The replacement cost of capital10

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:

ItemsIn rupees
Net value added at factor cost100
Value of output220
Sales tax15
Subsidy5
The replacement cost of capital20

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 

Now, use value-added method formulas:

GDPmp = VOO – IC

130 = 220 – IC

130 + IC = 220

IC = 220 – 130

IC = 90

Q7 Find Sales:

ItemsIn rupees
Net value added at factor cost300
Intermediate cost240
Indirect tax30
The net addition to stock-60
The replacement cost of capital40

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:

Price per output30
Output sold1000
Intermediate cost8000
Excise duty1600
Import duty400
The replacement cost of capital2000
The net change in stock-500

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

The value-added method is done.

Time to Test Yourself

National Income Assignment on Value-added method

Question 1 Calculate sales from the following data:

Items Amount (in INR)
NVA at FC400
Intermediate Consumption300
Indirect tax20
Depreciation30
Changes in stock(-50)

Question 2. Find NVA at Market price :

Items  Amount (in$)
Fixed capital good with a life of 5 years15
Raw materials6
Sales25
Net change in stock(-)2
Taxes on production1

Question 3. Calculate NVA at MP:

Items  Amount (in$)
Intermediate consumption1000
Consumption of fixed capital50
NIT150
Sales2000
Exports200
Net factor income to abroad100
Change in stock-(50)

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

Items  Amount (in$)
Subsidy10
Intermediate consumption1150
Net addition to stocks-13
Depreciation80
Indirect taxes (gst)20
Net value added at factor cost1250

Question 5. Calculate intermediate consumption from the following items:

Items  Amount (in$)
Value of output350
NVA at FC80
Subsidy5
Depreciation20
Indirect taxes (gst)15

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

Items  Amount (in$)
Intermediate cost90
Sales150
Subsidy10
Depreciation20
Exports7
Change in stock-10
Imports of raw material3

Question 7. Calculate NVA at fc :

Items  Amount (in$)
Intermediate purchase500
Sales(Domestic)800
Subsidy40
Depreciation30
Exports100
Closing stock20
Opening stock50

Question 8. Calculate sales from the following data:

Items  Amount (in$)
Net Value added at factor cost300
Intermediate consumption200
Indirect taxes (GST)20
Depreciation30
Changes in stock-50

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

Items Amount (in$)
Subsidy40
Sales800
Depreciation30
Exports100
Closing stock20
Opening stock50
Intermediate purchases500
Purchase of machinery for own use200
Import of raw material60

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

ParticularsAmount
Sales by firm X to household100
Sales by firm Y500
Purchases by household from firm Y300
Exports by firm Y50
Change in stock of firm X20
Change in stock of firm Y10
Imports by firm X70
Sales by firm Z to firm Y250
Purchases by firm Y from firm X200

Solve them and share your answers for solution credit. Email your solutions at Contact@LearnWithAnjali.com

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