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:

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 firm’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

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

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