# 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:**

Items | In Rupees |

Value of output of a primary sector | 2000 |

Intermediate consumption of the secondary sector | 800 |

Intermediate consumption of the primary sector | 1000 |

Net factor income from abroad | -30 |

Net indirect tax | 300 |

Value of output of the tertiary sector | 1400 |

Value of output of a secondary sector | 1800 |

Intermediate consumption of the tertiary sector | 600 |

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:**

Items | In rupees |

Purchase By B From A | 30 |

Sales By B To C | 25 |

Sales By B To Household | 35 |

Opening Stock Of B | 5 |

Opening Stock Of C | 10 |

Closing Stock Of B | 10 |

Purchase By B From D | 15 |

Exports By B | 20 |

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**

Take a look at the video explanation on value added problems:

**Q3** **Find GVAfc:**

Items | In rupees |

Sales | 500 |

Opening stock | 30 |

Closing stock | 20 |

Purchase of intermediate products | 300 |

Purchase of machinery | 150 |

Subsidy | 40 |

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:**

Items | In rupees |

Purchase of raw material | 300 |

Import duty | 20 |

Excise duty | 30 |

Net addition to stock | 50 |

Value of output | 500 |

Consumption of fixed capital | 10 |

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:**

Items | In rupees |

Net value added at factor cost | 150 |

Intermediate cost | 100 |

Excise duty | 20 |

Subsidy | 5 |

The replacement cost of capital | 10 |

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:**

Items | In rupees |

Net value added at factor cost | 100 |

Value of output | 220 |

Sales tax | 15 |

Subsidy | 5 |

The replacement cost of capital | 20 |

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:**

Items | In rupees |

Net value added at factor cost | 300 |

Intermediate cost | 240 |

Indirect tax | 30 |

The net addition to stock | -60 |

The replacement cost of capital | 40 |

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 output | 30 |

Output sold | 1000 |

Intermediate cost | 8000 |

Excise duty | 1600 |

Import duty | 400 |

The replacement cost of capital | 2000 |

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**. **Take a look at the below video on calculating sales**:

## 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 FC | 400 |

Intermediate Consumption | 300 |

Indirect tax | 20 |

Depreciation | 30 |

Changes in stock | (-50) |

Question 2. **Find NVA at Market price :**

Items | Amount (in$) |

Fixed capital good with a life of 5 years | 15 |

Raw materials | 6 |

Sales | 25 |

Net change in stock | (-)2 |

Taxes on production | 1 |

Question 3. **Calculate NVA at MP:**

Items | Amount (in$) |

Intermediate consumption | 1000 |

Consumption of fixed capital | 50 |

NIT | 150 |

Sales | 2000 |

Exports | 200 |

Net factor income to abroad | 100 |

Change in stock | -(50) |

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

Items | Amount (in$) |

Subsidy | 10 |

Intermediate consumption | 1150 |

Net addition to stocks | -13 |

Depreciation | 80 |

Indirect taxes (gst) | 20 |

Net value added at factor cost | 1250 |

Question 5. **Calculate intermediate consumption from the following items:**

Items | Amount (in$) |

Value of output | 350 |

NVA at FC | 80 |

Subsidy | 5 |

Depreciation | 20 |

Indirect taxes (gst) | 15 |

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

Items | Amount (in$) |

Intermediate cost | 90 |

Sales | 150 |

Subsidy | 10 |

Depreciation | 20 |

Exports | 7 |

Change in stock | -10 |

Imports of raw material | 3 |

Question 7. **Calculate NVA at fc :**

Items | Amount (in$) |

Intermediate purchase | 500 |

Sales(Domestic) | 800 |

Subsidy | 40 |

Depreciation | 30 |

Exports | 100 |

Closing stock | 20 |

Opening stock | 50 |

Question 8. **Calculate sales from the following data:**

Items | Amount (in$) |

Net Value added at factor cost | 300 |

Intermediate consumption | 200 |

Indirect taxes (GST) | 20 |

Depreciation | 30 |

Changes in stock | -50 |

Question 9. **Calculate the firmâ€™s net value added at factor cost:**

Items | Amount (in$) |

Subsidy | 40 |

Sales | 800 |

Depreciation | 30 |

Exports | 100 |

Closing stock | 20 |

Opening stock | 50 |

Intermediate purchases | 500 |

Purchase of machinery for own use | 200 |

Import of raw material | 60 |

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

Particulars | Amount |
---|---|

Sales by firm X to household | 100 |

Sales by firm Y | 500 |

Purchases by household from firm Y | 300 |

Exports by firm Y | 50 |

Change in stock of firm X | 20 |

Change in stock of firm Y | 10 |

Imports by firm X | 70 |

Sales by firm Z to firm Y | 250 |

Purchases by firm Y from firm X | 200 |

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

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