Question

Explain any two precautions to be adopted while estimating National Income by Value-added method.

Explain any two precautions to be adopted while estimating National income by Income method.

Answer 1

While using the Value-Added Method for estimating National Income, the following precautions should be taken:

1. Avoid Double Counting: 
   1. The value of intermediate goods should not be included in the national income to prevent overestimation.
   2. Only the final value added at each stage of production should be considered.
   3. Example: If flour is sold to a bakery and later converted into bread, only the final value of bread should be counted, not the flour separately.
2. Exclude Transfer Payments:
   1. Transfer payments such as pensions, scholarships, and unemployment allowances should not be included, as they do not reflect actual production.
   2. These are unearned incomes and do not contribute to national output.

Answer 2

When we use the income approach to calculate national income, it is very important to ensure that we don’t double-count anything and that the calculation is correct. Here are two important safety tips:

1. Exclude Transfer Income: Calculations of national income should not include transfer income, such as gifts, scholarships, pensions, or unemployment payments. These earnings are not indicative of income from ongoing production. They involve the transfer of pre-existing income from one party to another without any matching input into the creation of goods or services. If they were included, the national income figure would be inflated.
2. Avoid including Income from the Sale of Second-Hand Goods: The national income should not include the sale of used products. When these things were first manufactured and sold, their value was already taken into consideration. They would be counted twice if they were added again. Included should only be the fee or brokerage received from the sale of used products, which is an example of a current service.