NI’ by value added method of national income measuring

       While estimating the national income through the value   added method sometimes value of product is counted more   than one time, it called double counting, it leads to over   estimation of national income.

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‘NI’ by value added method :-

i)                 Gross value added by primary sector.

                           +

ii)              Gross value added by secondary sector.

                           +

iii)           Gross value added by tertiary sector.

                           -

iv)            - Deprecation.

                           -

v)               - Net indirect Tax.

                           +

vi)            Net factor income from abroad.

For Example:-

                     Suppose a farmer produces 50 kg of wheat. He sells wheat to the baker at a price of ₹10 per kg the value of wheat become ₹500 (50 X 10) rs. 

The baker process the wheat and make breads and sells to a whole seller for ₹1000 rs.

At last the whole seller sell it to a final consumer at profit of ₹200 so the at last amount of sell is in rs stands ₹1200 (₹1000+₹200) rs.

     Sum total of all value added by three sector output is

                    = ₹2700 (₹500 + ₹1000 + ₹1200)

In which the value of wheat has been counted three times and value of breads counted two-times. It called double counting.

There are two way of avoiding double counting:-

                                                             i) Final product approach.

                                                            ii) Value added method.

    According to value added method,

 First-of-all identify intermediate consumption of each producing unit. Then we calculated….

Stape by stape:-

***Formula: -    ”Value added = value of output – intermediate”

                   

…Thus value added by all three production unit ₹1200 (There is no chance to double counting)

** Note: - Here we take farmer are not use any intermediate good _{but it not possible}