Question

State three difficulties in calculating national income by the product (value-added) method.

Answer 1

Three major challenges in estimating national income through the product method include:

1. Difficulties in valuing inventories due to fluctuations in their prices over time.
2. Problems in calculating depreciation, particularly whether it should be based on the original (historical) cost or the replacement cost.
3. In several instances, it is hard to clearly distinguish between intermediate goods and final goods.