Question

Explain the precautions that are taken while estimating additional income by the value-added method.

Answer 1

Precautions Regarding Calculation of National Income by Value-Added Method

1. Value of the sale and purchase of second-hand goods are not included in the national income of the current accounting year. This is because the value of these goods was included in the national income in the accounting year in which they were produced. Thus, if the value of these goods is also included in the current year, then it will lead to the problem of double counting of the value of such goods.

2. Although the value of the second-hand goods are not included in the national income, but the brokerage/commission paid to facilitate the sale or purchase of these goods is included in the estimation of the value added.

3. Only the value of final goods and services are included in the estimation of value added and value of intermediate goods is not included in the national income. This is because the value of intermediate goods is already reflected in the value of the final goods.

4. At times, the producer/firm keeps a certain portion of the output for self-consumption. Such a portion of production that is retained for self-consumption should also be included in the estimation of the value added.

5. Similarly, the imputed rental value of the owner-occupied houses/land should also be taken into account. This is because all houses/land, whether owner-occupied or rented-out have a rental value.

6. Some of the services that are meant for self-consumption such as the services of the housewives, a farther teaching his own child are not included in the national income. This is because it is difficult to estimate the market value of such services.