Answer in Brief
In order to avoid double counting, value added approach is used.
In order to avoid double counting value added approach is used. According to this approach, the value added at each stage of the production process is included. The difference between the value of final outputs and inputs, at each stage of production is called the value added. Thus, GNP is obtained as the sum total of the values added by all the different, stages of the production process, till the final output is reached in the hands of consumers, to meet the final demand. This can be illustrated with the help of the following table.
Here, we have assumed a much simplified model of an economy, producing only a single final product, bread. It is assumed, that there are four productive stages in production of bread.
In the given example farmer produces and sells wheat for 700/- to the miller. Miller sells flour for 1000/- to the baker. Baker sells bread for 1300/- to the retailer/merchant. Retailer sells bread for 1400/- to the consumers. So the value added by farmer ( 700), miller ( 300), baker ( 300) and retailer ( 100) that is, total of 1400 should be included in the national income.
To avoid double counting, either the value of final output or the sum of value added should be taken in the estimate of GNP.
Concept: Concept of National Income
Is there an error in this question or solution?
Video Tutorials For All Subjects
- Concept of National Income