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Value Added Approach To Gnp

 Value Added Approach to GNP

           This is one of the methods for calculating GNP. The money value of final goods and services produced at current prices during a year is taken into account. This is one of the ways to avoid double counting.

          The difference between the value of material outputs and input at each stage of production is called the value added. If all such differences are added up for all industries in the economy, we arrive at the GNP by value added.

The formula for computing value added GNP is as under.

GNP by Value Added = Gross Value added + Net Income Overseas.

Let us consider an illustration to know clearly of this method.

Illustration 3:

The below given tablet (2) represents various sectors which yields national income and their corresponding productivities along with their transitional purchases, you have to ascertain the following.

  1. Calculate Gross Domestic Product,

  2. Net Domestic Product and

  3. Value Added GDP.

  4. The transactions relating to these are as follows – Tablet (1)

Tablet (1)

Items

Value in $

Income Earned from Leasing

10

Earned Profits

15

Administrative Expenses

50

Net interest

5

Depreciation

8

Indirect Taxes

7


Tablet (2)

Sector

Total Productivity in units

Transitional Inputs
Value in $

A

B

C

Farming

100

50

Production

250

125

Rest of others

150

75

Total

500

250

Solution

(iii)                                     GDP by Value Added

Sector

Total Productivity in units

Transitional Inputs
Value in $

Value Added
Value in $
{Obtained by applying the formula}

A

B

C

D = (B – C)

Farming

100

50

50

Production

250

125

125

Rest of others

150

75

75

Total

500

250

250

Hence the value added approach of GDP has been computed.

Now let us compute the Gross Domestic Product

(i) Gross Domestic Product


Items

Value in $ (Millions)

Income Earned from Leasing

10

Earned Profits

15

Administrative Expenses

50

Net interest

5

Indirect Taxes

5

Depreciation

10

Gross Domestic Product

95



(iii) Net Domestic Product

Items

Value in $ (Millions)

Market Value of Productivity

Less: Cost of Transitional Purchases

Gross Value Added

Less: Depreciation

Net Value Added or Domestic Product at Market Price

Less: Indirect Taxes

Value Added Factor cost

500

250

250

10

240

5

235

Points to be Noted

  1. The total value added equals the value of gross national product of the economy. Of which, value added, the major portion goes in the form of administrative expenses, leased income, profits and interest. A small portion goes to government in the form of indirect taxes and the remaining amount for depreciation.
  1. Thus we find that the total gross value added of an economy is greater than the Gross Domestic Product. If depreciation is deducted from the gross value added, we obtain, net value added to about $240 millions.
  1. This is nothing but Net Domestic Product at market prices. Again, if indirect taxes $5 millions are deducted from the net domestic product of the market, of $240 millions, we obtain, $235 millions as value added factor cost.

Its Importance

            The value added method for measuring national income is more realistic than the product and income methods for the reason that it avoids the problem of double counting by excluding the value of intermediate products.

Thus this method establishes the importance of intermediate products in the national economy. Next to it, by studying the national income accounts relating to value added the contribution of each production sector to the value of the GNP can be found out. For instance, it can tell us whether agriculture is contributing more, or the share of manufacturing is dropping or the tertiary sector is enhancing in the present year when compared to some previous years.

Third this method is highly useful for the reason that “it provides a means of checking the GNP estimates obtained by summing the various types of commodity purchases.”

Conclusion

            From the modern point of view, Simon Kuznets has defined national income as “the net output commodities and services flowing during the year from the country’s productive system in the hands of the ultimate consumer.” Conversely, in one of the reports of United Nations, national income has been defined on the basis of the systems of estimating national income, as net national product, as addition to the shares of different factors and as net national expenditure in the country in a year’s time. In practice, while estimating national income, any of the definitions may be adopted for the reason that the same national income would be derived, if different items were correctly included in the estimate.

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