Q.Explain the product (output) method of measuring national income. What precautions must be taken to avoid double counting?
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Start your 14-day free trial to unlock the full solution →The Product (Output/Value Added) Method measures national income by summing the value each productive enterprise adds to its inputs, industry by industry — agriculture, mining, manufacturing, trade, and services:
Value added at each stage is the difference between the value of a firm's output and the cost of the intermediate inputs it purchased from other firms — this is essential, because if the full sale value at every stage were added up instead of just the value each stage newly contributes, the same raw material or component would be counted repeatedly as it passes through each stage of production.
Beyond using value added itself, four further precautions are needed to avoid double counting:
- Count only final goods, or equivalently, only the value added at each production stage — never the gross sale value of goods that are themselves inputs into another product.
- Exclude the sale of second-hand goods — a used vehicle or an old house changing hands creates no new output this year (only a dealer's service commission, if any, is newly produced output).
- Exclude purely financial transactions, such as the buying and selling of existing shares, bonds, and other securities — these merely transfer ownership of an existing asset, without creating any new goods or services. …
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