5.1. Value Added Method

Under the value added or production method, the GDP is calculated at market prices, which is the total value of outputs produced at different stages of production. It needs to be mentioned that caution should be taken to take Final Goods and not Intermediate Goods, as it will result in Double Counting.

Some of the goods and services included in production are:

♤ Goods and services sold in the market.

♤ Goods and services not sold but supplied free of cost.

♤ Services provided by the agents.

For example, in a Cycle Manufacturing Unit, computing the total value of cycles produced in a year, the final value of the cycle (Multiplied by total no of units produced) which is ready to be marketed for sale will be taken, not the cost of intermediate goods which are used in the process of manufacture, as it will result in double counting. Suppose the market price of a cycle is Rs. 2000 which includes, say, profit margin of Rs. 200 besides the cost of manufacturing of Rs. 1800. This 1800 includes all costs including components and parts etc. (these are intermediate goods which are used in the process of production.) If the costs of parts etc. are also taken while computing final value of total units produced, it will give inflated figure and hence result in double counting error. Similarly, at macro level, while computing the national Income under Value Added Method the value of final goods and services should be taken up to avoid the double counting error as the cost of Intermediate Goods are already counted in the final value of the product.

Some of the goods and services not included in production are:

♤ Second hand items and purchase and sale of the same. Sale and purchase of used cars, for example, are not a part of GDP calculation as no new production takes place in the economy.

♤ Production due to illegal activities.

♤ Non-economic goods such as air and water.

♤ Transfer Payments such as scholarships, pensions etc. are excluded as there is income received, but no good or service is produced in return.

♤ Imputed rental for owner-occupied housing is also excluded.