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Methods of Measuring GDP: Product Method

Check out the details about Methods of Measuring GDP - Product Method.

Introduction

  • The Product method is also known as the output method or value-added method. 
  • Using the product method, GDP is calculated by summing the gross value added of all industries (resident sectors) during the various stages of production.
  • With the help of this method,  GDP is estimated at the production level. 
  • At the production level, GDP is the value of final goods and services produced in a country within the domestic territory plus net factor income from the rest of the world. 

 

Computation of GDP through Product Method

  • To determine the GDP using this method, the first step involves calculating the net value added at factor cost (NVAfc). Calculating NVAfc requires net indirect taxes to be deducted.
  • This method of calculating national income arranges the economy into different categories of industries such as transportation, fishing, agriculture, communication etc.
  • As this method focuses on net value addition by each of the components in production, therefore the following elements should be excluded or subtracted from the output of the enterprise.
  • Raw materials consumption
  • Capital consumption
  • Net Indirect Taxes

Steps to calculate national income using product method

Step 1: Identification and classification of producing units

  • Identify all the producing units in the domestic economy and classify them into the primary, secondary and tertiary sectors.

Step 2: Estimation of Gross Value Added of each sector

Gross Value Added (GVA)= Value of Output – Intermediate Consumption

Step 3: Estimation of GDP

  • Then add the GVA of all the three sectors, Primary, Secondary and Tertiary to get the GDP of the economy.

Step 4: Estimation of National Income

  • Finally, to compute National Income (NNPfc) from GDP-MP
    • Net factor income from abroad(NFIA) is added,
    • Depreciation is subtracted and
  • Net Indirect Taxes are also deducted.

 

Necessary Precautions While Estimating GDP using Production Method

  • Production for self-consumption: That output which is produced for self-consumption and whose value can be estimated, must be included in the estimates of production because it is a part of the production of the current year.
  • Sale of second-hand goods: The sale of second-hand goods should not be included in national income because the value of these goods had already been included earlier.
  • Commission paid to the broker for the sale and purchase second-hand goods should be included because it is payment made for the services provided in the current year.
  • Value of intermediate goods should not be included because it leads to double counting.
  • Services of a housewife should not be included because it is very difficult to evaluate them.