The document discusses the value added method of calculating gross domestic product (GDP). It defines value added method as measuring national income in terms of the value added by each producing enterprise. It provides the formula for calculating value added, gross value added, net value added, and national income. It also discusses concepts like primary, secondary and tertiary sectors. The document cautions against double counting in national income calculation and provides steps and examples to clarify the application of value added method.

1. VALUE ADDED
METHOD
XII – CBSE
ECONOMICS

2. PRESENTATION BY:-
CS. SOHIL GAJJAR
CS, MA [ECONOMICS], B.COM
CO-FOUNDER &
CHIEF MENTOR OF
ACUMEN EDUCATION

3. TOPICS TO BE COVERED
• DEFINITION
• FORMULA
• EXAMPLE
• CONCEPT CLARITY EXAMPLE
• STEPS
• PRECAUTIONS
• PROBLEM OF DOUBLE COUNTING

4. DEFINITION
Value Added Method is that method, which measures
national income in terms of value added by each
producing enterprise in the economy during an
accounting year.

5. FORMULA
1. GROSS VALUE ADDED@MP/VALUE ADDED = VALUE OF OUTPUT – INTERMEDIATE COST
2. VALUE OF OUTPUT = SALES + CHANGE IN STOCK [Closing –Opening]
OR SALES + ADDITION TO STOCK/INCREASE IN STOCK
OR SALES - FALL IN STOCK/DECREASE IN STOCK
OR SALES + INVENTORY INVESTMENT
3. SALES = PRICE x QUANTITY/UNITS/OUTPUT
4. NVAMP = GVAMP - DEPRECIATION
5. GVAFC = GVAMP - NIT [IDT – SUBSIDIES]
6. NVAFC = GVAMP - DEP – NIT
NVAFC IS OUR DOMESTIC INCOME
NVAFC = NDPFC
ADD NFIA TO NVAFC TO GET NATIONAL INCOME [NNPFC]

6. SYNONYMS OF
INTERMEDIATE COST
1. INTERMEDIATE PURCHASES
2. PURCHASES
3. PURCHASE OF RAW MATERIALS
4. SINGLE USE PRODUCER GOODS
5. INPUTS/INPUTS CONSUMED
6. PURCHASE OF RAW MATERIALS
7. RAW MATERIALS CONSUMED
NOTE: 1. NEED TO ADD COST OF LABOUR, POWER,
FUEL, WATER, GAS ETC. IF GIVEN SEPARATELY
2. PURCHASE OF MACHINARY OR ANY CAPITAL
GOOD IS NOT INCLUED IN INTERMEDIATE COST

8. EXAMPLE
SECTOR PRODUCT VALUE OF
OUTPUT
INTERMEDIATE
COST
VALUE
ADDED
PRIMARY COTTON 1000 - 1000
SECONDARY THREAD
& COTTON
CLOTH
3000 1000 2000
TERTIARY SHIRT 6000
[GDP MP]
3000 3000
GVA MP - - 6000
[GVA MP]
GDP MP [6,000] = GVA MP [1,000 + 2,000 + 3,000 = 6000]
GVAPMP = VALUE ADDED BY PRIMARY + SECONDARY + TERTIARY SECTOR
GDP MP IS THE FINAL VALUE OF SHIRT RS. 6,000
HENCE, GVAP MP = GDP MP

9. CONCEPT CLARITY
• PRIMARY
SECONDARY
TERTIARY

10. STEPS OF VALUE ADDED METHOD
Step I Identify and classify the production units of an
economy into primary, secondary and tertiary.
Step II Estimate GVAMP. It is the sum of Gross Value Added
by all the sectors of an economy.
GVA = GDP MP
Step III Calculate Domestic Income NDP FC
By subtracting the amount of depreciation and net indirect taxes
from GVAMP we get domestic income.
NVA FC = GVP MP – Depreciation – NIT
Step IV Estimate NFIA to arrive at National Income
NVA FC + NFIA = NNP FC [National Income]

11. PRECAUTION OF VALUE
ADDED METHOD
• Intermediate goods are not included in the national income
• Sale and purchase of second hand goods is not included as they were included in
the year in which they were produced.
• However, any commission, brokerage on sale or purchase of such goods will be
included in the national income as it is a productive service.
• Production of services for self consumption [domestic services] are not included.
Example; services like of housewife, gardening etc., as these services are produced
and consumed at home and never enter the market place and are termed as non-
market transactions.
• Imputed value of production for self consumption is taken into account. Because,
these goods are like those produced for the market. They are not sold simply
because of their need by the producers themselves.
• Imputed rent on the owner occupied house is also taken into account. Because, all
house have rental value, no matter these are self-occupied or rented out.
• Change in stock of goods will be included as it is a part of capital formation.

12. GVA MP by Primary Sector
+
GVAP MP by Secondary Sector = GVA MP
+
GVAP MP by Tertiary Sector
- Depreciation
- Net Indirect Taxes
= NVAFC/NDPFC [DOMESTIC INCOME]
+
NFIA
=
NNPFC [NATIONAL INCOME]

13. PROBLEM OF DOUBLE COUNTING
In measuring the National Income, the value of only final goods and
services is to be included. However, the problem of double counting arises
when value of intermediate goods is also included along with the value of
final goods. Double counting refers to counting of an output more than
once while passing through various stages of production.
There are two alternative ways to avoid double counting
 Final Output Method: Value of only final goods should be added to
determine national income.
 Value Added Method: According to this method, sum total of value added
by each producing unit should be taken in national income.

14. SYNONYMS OF VALUE
ADDED METHOD
1. PRODUCT METHOD
2. INVENTORY METHOD
3. NET OUTPUT METHOD
4. INDUSTRIAL ORIGIN METHOD
5. COMMODITY SERVICE METHOD

15. #think economics think sohil sir
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