Question

Answer in detail:

Explain in detail the output method of measuring national income

Answer 1

National Income is one of the important subject matter of macroeconomics. The total income of the nation is called national income. In real terms, national income is the flow of goods and services produced in an economy during a year. There are three methods of measuring national income.

1. The output method approaches national income from the output side.

2. This method is also known as product method or inventory method.

3. According to this method, the economy is divided into different sectors, such as agriculture, mining, manufacturing, small enterprises, commerce, transport, communication and other services.

4.Under this method, national income is calculated by either of the following two ways:

1. Adding the market value of all final goods & services produced during the year.
2. Adding up the value-added at each stage of production till the final stage of production

5. While using this method utmost care must be taken to avoid multiple or double counting

6. Output method is widely used in the underdeveloped countries. However, it is less reliable because of the margin of error.

7. 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.

8. This method suggests two alternative approaches for the measurement of GNP; namely, Final Goods Approach and Value Added Approach.

• Final Goods Approach/The Final Product Approach

1. As per this approach, while measuring national income:

1. The value of all final goods and services produced in primary, secondary and tertiary sector are included.
2. The value of all intermediate transactions is ignored.

2. Final goods: Goods which are ready for final consumption Intermediate goods: Goods involved in the process of producing final goods.

3. Hence, value of final output includes the value of intermediate products.

4. E.g.: Price of bread includes the cost of wheat, making of flour, etc. Here, wheat and flour are both intermediate goods and their values are paid up during the production process. In final product i.e. bread, the values of intermediate goods are already included.

5. A separate accounting of intermediate goods and the final goods will lead to double counting.

6. In order to avoid double counting, only the value of final product or goods must be computed.

• Value Added Approacch/The value Added Method

1. According to this approach, value added at each stage of the production process is included.

2. The value added is the difference between the value of final outputs and inputs, at each stage of production.

Value added = Value of final output – Value of input

3. Thus, GNP is the sum total of value added by the different stages of the production process till the final output is reached in the hands of consumers.

4. This can be illustrated with the help of following table:

Production stage	Value of output ₹	Value of input ₹	Value added ₹
Cotton	150	0	150
Yarn	250	150	100
Cloth	400	250	150
Shirt (final good)	500	400	100
Total value			500

The value added at each stage is calculated by deducting the value of inputs from the value of output produced. The sum total of value added at different stages makes GNP.

1. In table, the value of final good (Shirt) is ₹ 500.
2. The sum of value added at each stage of production is also ₹ 500. 
3. Thus, total value added is equal to the value of final goods. (150 + 100 + 150 + 100 = 500)