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
Step 2: Estimation of Gross Value Added of each sector Gross Value Added (GVA)= Value of Output – Intermediate Consumption Step 3: Estimation of GDP
Step 4: Estimation of National Income
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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.