Question

Explain any two precautions to be adopted while estimating National Income by Value-added method.

Answer 1

While using the Value-Added Method for estimating National Income, the following precautions should be taken:

1. Avoid Double Counting: 
   1. The value of intermediate goods should not be included in the national income to prevent overestimation.
   2. Only the final value added at each stage of production should be considered.
   3. Example: If flour is sold to a bakery and later converted into bread, only the final value of bread should be counted, not the flour separately.
2. Exclude Transfer Payments:
   1. Transfer payments such as pensions, scholarships, and unemployment allowances should not be included, as they do not reflect actual production.
   2. These are unearned incomes and do not contribute to national output.