CONVERSIONS

+ Depreciation
NET

- Depreciation

GROSS

+ Net Factor Income from Abroad

DOMESTIC

NATIONAL
- Net Factor Income from Abroad
+ Net Indirect Taxes

FACTOR COST

- Net Indirect Taxes

MARKET PRI

Net Indirect Taxes = Indirect Taxes Subsidies

Net Factor Income from Abroad = Factor Income from abroad Facto
Income To abroad

1. Value Added Method

Value added method is also named as Production method. This
method is used to measure national income at the phases of
production of each enterprise and each industrial sector during a
year. In fact this method measures the contribution of each
enterprise in the flow of goods and services in the economy.
Under this method, the economy is- generally divided into three
industrial classes namely
(a) Primary sector
(b) Industrial sector and
(c) Service sector.
The main enterprises included in these sectors are agriculture,
fishing, forestry, mining, manufacturing, construction, transport
and communication, trade and commerce insurance, banking etc.
For computing national income, the values added by the above
three sectors at each stage is worked out. The value of output at
each enterprise is found by multiplying the physical output with
the market prices of the goods produced. For example, firm A
produces necessary raw material and sells it in market for Rs.
2000 to firm B. The firm B manufactures raw material, into finished

Precautions for this approach

There are certain precautions which are to be taken to
avoid miscalculation of national income using this
method. These in brief are:
1 Problem of double counting: When we add up the
value of output of various sectors, we should be careful
to avoid double counting. This pitfall can be avoided by
either counting the final value of the output or by
including the extra value that each firm adds to an item.
(ii) Value addition in particular year: While
calculating national income, the values of goods added
in the particular year in question are added up. The
values which had previously been added to the stocks of
raw material and goods have to be ignored. GDP thus
includes only those goods and services that are newly
produced within the current period.
(iii) Stock appreciation: Stock appreciation, if any,
must be deducted from value added. This is necessary
as there is no real increase in output

ACCORDING TO VALUE ADDED METHOD

GDP@MP = Value of Output intermediate consumption
VALUE OF OUTPUT = SALES + CHANGE IN STOCK
CHANGE IN STOCK = ( CLOSING STOCK OPENING STOCK)

+ Depreciation
- Depreciation
+ Net Factor Income from Abroad

ESTIC

R COST

GROSS

NATIONAL
- Net Factor Income from Abroad
+ Indirect Taxes
- Indirect Taxes

MARKET PRICE

Calculate Net Value added at factor cost from the following data :
Sr.
1
2
3
4
5
6
7

No. Items
Purchase of machinery
Sales
Intermediate Cost
Indirect taxes
Change in stock
Excise Duty
Stock of raw material

Rs. In Crore
100
200
90
12
10
6
5

Sol: NVA FC = Sales + Change in Stock Intermediate Cost

Indirect Taxes
= 200 + 10 90 12
= 108 Crore

Q. An Economy has two firms A & B on the basis of following

information find
out
a) Value added by firm A & B
b) GDP at Market Price
1
2
3
4
5
6

Rs. In Lakh
Exports by firm A
20
Imports by firm A
50
Sales to house holds by firm A
90
Sales to firm B by firm A
40
Sales to firm A by firm B
30
Sale to house hold by firm B
60

Sol: a) Value added by firm A

= Sale to households +Sales to firm B + Exports Imports Purchase
from firm B
= 90 +40+20-50-30 = 70 Lakh
Value added by firm B
= Sales to Firm A + Sales to households purchase from firm A
= 30+60-40
= 50 Lakh
b) GDP@MP = Value added by firm A + value added by Firm B

I. The Expenditure Method:

The expenditure approach measures national income as total
spending on final goods and services produced within nation during an
year: The expenditure approach to measuring national income is to add
up all expenditures made for final goods and services at current market
prices by households, firms and government during a year. Total
aggregate final expenditure on final output thus is the sum of four broad
categories of expenditures (i) consumption (ii) Investment (iii)
government and (iv) Net exports.
(i) Consumption expenditure: Consumption expenditure is the
largest component of national income. It includes expenditure on all
goods and services produced and sold to the final consumer during the
year.
(ii) Investment expenditure: Investment is the use of todays
resources to expand tomorrows production or consumption. Investment
expenditure is expenditure incurred on by business firms on(a) new
plants, (b) adding to the stock of inventories and (c) on newly constructed
houses.
(iii) Governnnent expenditure: (G) it is the second largest component
of national income. It includes all government expenditure on currently
produced goods and services but excludes transfer payments while
computing national income.
(iv) Net exports: Net exports are defined as total exports minus total
imports.

Precautions
While estimating national income through expenditure method, the
following precautions should be taken.
(i)The expenditure on second hand goods should not be
included as they do not contribute to the current years production of
goods.
(ii) Similarly, expenditure on purchase of old shares and bonds is
not included as these also do not represent expenditure on currently
produced goods and
services.
(iii)Expenditure on transfer payments by government such as
unemployment benefit, old age pensions, interest on public debt
should also not be included because no productive service is rendered
in exchange by recipients of these
payments.

ACCORDING TO EXPENDITURE METHOD

Gross Domestic Product At Market Price = Private Final
Consumption Expenditure + Govt. Final Consumption
Expenditure + Gross Domestic Capital Formation + Net Exports
Gross Domestic Capital Formation = Gross Domestic Fixed Formation +
Change in Stock
Gross Domestic Capital Formation = Net domestic capital formation +
Consumption of
fixed capital
Net Exports = Exports Imports
NOTE - Consumption of fixed capital is same as depreciation.*

From the following data calculate GNP at factor

cost by Expenditure Method
Sr.
No. Items
Rs. in Crore
1
Net Domestic capital formation
500
2
Compensation of employees
1850
3
Consumption of fixed capital
100
4
Govt. Final consumption Expenditure
1100
5
Private Final consumption Expenditure
2600
6
Rent
400
= Private Final consumption Expenditure + Govt. Final
7GNP FC
Dividend
consumption
Expenditure + ( Net Domestic capital formation +
200
8consumption
Interestof fixed capital) + Net Exports + Net Factor Income From
Abroad
500 - Net Indirect Taxes
9
Net Exports
= 1100
(-)
100 +2600 + (500 +100) + (-) 100 + (-)50 250
= 3900
CRORE
10
Profits

From the following data calculate National Income by Expenditure

methods:

(Rs crore)
(i) Government final consumption expenditure
100
(ii) Subsidies
10
(iii) Rent
200
(iv) Wages and salaries
600
(v) Indirect taxes
60
(vi) Private final consumption expenditure
800
(vii) Gross domestic capital formation
120
(viii) Social security contributions by employers
55
(ix) Royalty
25

Expenditure Method
National Income = vi + i + vii + xiv v + ii xii x
= Private final consumption expenditure + Government final
consumption expenditure + Gross domestic capital formation + Net
exports - Indirect taxes + Subsidies - Consumption of fixed capital - Net
factor income paid to abroad
= 800 + 100 + 120 + 70 60 + 10 10 30
= Rs 1,000 crore

3. INCOME METHOD :
Net Domestic Product At Factor Cost = Compensation Of
Employees + Operating Surplus +
Mixed Income of Self
Employed
1. WAGES & SALARIES
CASH AS WELL AS KIND
* COMPENSATION OF EMPLOYEES
CONTRIBUTION BY THE EMPLOYER

+
2. SOCIAL SECURITY
+
3. RETIREMENT

PENSION

* OPERATING SURPLUS

1. RENT
+
2. INTEREST
+

From the following data calculate GNP at factor

cost by INCOME Method
Sr.
No. Items
Rs. in Crore
1
Net Domestic capital formation
500
2
Compensation of employees
1850
3
Consumption of fixed capital
100
4
Govt. Final consumption Expenditure
1100
5
Private Final consumption Expenditure
2600
6
Rent
400
Method
7Income
Dividend
GNP@FC
= Compensation of employees + ( Rent + Interest +
200
) + Consumption of fixed capital + Net Factor Income
8Profits
Interest
From
500Abroad
9
Net Exports
= 100
1850 + (400 +500 +1100) + 100+ (-)50
(-)
= Rs Profits
3900 crore
10

From the following data calculate National Income by Income methods:

(Rs crore)
(i) Government final consumption expenditure
100
(ii) Subsidies
10
(iii) Rent
200
(iv) Wages and salaries
600
(v) Indirect taxes
60
(vi) Private final consumption expenditure
800
(vii) Gross domestic capital formation
120
(viii) Social security contributions by employers
55
National Income = iv + viii + (iii + ix ) + xi + xiii x
(ix) Royalty
= 600 + 55 + (200 +25) + 20 +130 -30
25
= Rs 1,000 crore
(x) Net factor income paid to abroad
30