Methods of Measurement of National Income - Output Method/Product Method

Output Method :
This method of measuring national income is also known as product method or inventory 
method. This method approaches national income from the output side. According to this method, the economy is divided into different sectors, such as agriculture, mining, manufacturing, small enterprises, commerce, transport, communication and other services. The output or product method is followed either by valuing all the final goods and services, produced during a year, at their market price or by adding up all the values at each higher stage of production, until these products are turned into final products.
While using this method utmost care must be taken to avoid multiple or double counting. 
To avoid double counting this method suggests two alternative approaches for the measurement of GNP:

i) Final Goods Approach / The Final Product Approach :
Final goods are those goods which are ready for final consumption. According to this approach, value of all final goods and services produced in primary, secondary and tertiary sector are included and the value of all intermediate transactions are ignored. Intermediate goods are involved in the process of producing final goods, that is, the final flow of output purchased by consumers. Hence, the value of final output includes the value of intermediate products.
For example, the price of bread includes, the cost of wheat, making of flour, etc., wheat and flour are both intermediate goods. Their values are paid up during the process of production. In the final product i.e. bread, the values of intermediate goods are already included.
Thus, a separate accounting of the values of intermediate goods, along with the accounting of the value of final product, would mean double counting. To avoid this, the value of only the final product or goods must be computed.

ii) Value Added Approach / The Value Added Method :
In order to avoid double counting value added approach is used. According to this approach, the value added at each stage of the production process is included. The difference between the value of final outputs and inputs, at each stage of production is called the value added. Thus, GNP is obtained as the sum total of the values added by all the different, stages of 
the production process, till the final output is reached in the hands of consumers, to meet 
the final demand. This can be illustrated with the help of the following table.

Value added at each stage is calculated by deducting the value of inputs from the value of 
output produced. The sum total added at different stages make GNP. In the above table the value of final good (Shirt) is ₹500. The sum total of value added at each stage of production is also ₹500. Thus the total value added is equal to the value of final goods. (150 + 100 + 150 + 100 = 500)

Precautions :

1) To avoid double counting, only the value of final goods and services must be taken into 
account.
2) Goods used for self consumption by farmers should be estimated by a guess work. Imputed value of goods produced for self consumption is included in national income. 
3) Indirect taxes included in the market prices are to be deducted and subsidies given by 
the government to certain products should be added for accurate estimation of national 
income. 
4) While evaluating output, changes in the price level between different years must be 
taken into account.
5) Value of exports should be added and value of imports should be deducted. 
6) Depreciation of capital assets should be deducted. 
7) Sale and purchase of second hand goods should be ignored as it is not a part of 
current production.
Output method is widely used in the underdeveloped countries. However, it is less reliable because of the margin of error. In India, this method is applied to agriculture, mining and manufacturers, including handicrafts. But it is not applied for transport, commerce and communication sectors in India.