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

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.