Learning Objectives
- Product Method of Nationa Income Accounting
- The concept of Final Product Method and Value-added Method
- Value-added Approach to National Income Accounting
The Product Method of National Income Accounting can be computed by adding up the production of goods and services of all industries operating in the economy. different industries of an economy get involved in the production of various goods and services. Some firms produce the final product, while some product the intermediate goods. Both the final and intermediate goods must come in the account of National Income at the same time.
There are two approaches to Product Method of National Income Accounting. They are Final Product Method and Value Added Method.
In the Final Product Method, only the final value of goods and services are taken into consideration. In the value-added method, the value-added in each stage of production is added up. For clarification, let us consider an economy with three sectors, primary sector (agriculture) that produces wheat, secondary sector (industry) that transforms wheat into flour, and the tertiary sector (Bakery) that produces Cakes by using the flour.
| Sector | Industry/Firm | Product | Cost Price | Selling Price | Value-added |
| Primary | Agriculture | Wheat | 0 | 200 | 200 |
| Secondary | Wheat Mill | Flour | 200 | 600 | 400 |
| Tertiary | Bakery | Cake | 600 | 900 | 300 |
| Total Value Added | 900 | ||||
Source: A hypothetical data
In this example, if we calculate the National Income from Final Product Method, we get Rs. 900; similarly, using the value-added approach, we get a total value-added Rs. 900. Thus, to eradicate the problem of double counting, we only add up the value-added by each sector.
Value-added Approach to National Income Accounting
| Particular | Amount |
Value of Output (A) · Sales (Domestic sales + Export) · Change in stock (Closing stock – Opening stock) | Xxx |
Intermediate Consumption (B) · Purchase of raw materials · Purchase of services · Electricity, water, and energy for production · Imports | Xxx |
| Gross Value Added (C) [A – B] | XXX |
| Net Factor Income from Abroad (F) | xxx |
| GNP at Market Price (G) (E + F) | xxx |
| Net Indirect Tax (H) [Indirect Tax – Subsidy] | xxx |
| GNP at Factor Price (I) (G – H) | Xxx |
| Depreciation (J) | Xxx |
| NNP at Factor Price (K) (I – J) | Xxx |
Less: Social Security Allowance Retained Earning Corporate Business Tax Net Interest Add: Transfer Payment Personal interest income | |
| Personal Income | xxx |
Less: Personal tax and non-tax payment | |
| Disposable Income | xxx |
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