📊 Value Added Method Precautions
Inclusions and Exclusions from National Income under Production or Value Added Method
Second Hand Goods
When we calculate national income, we don't count the sale and purchase of second-hand goods. Why? Because these items were already counted when they were first made and sold. It's like counting the same apple twice!
EXCLUDED
Sale & Purchase of Second-hand goods
Already counted in the year they were producedINCLUDED
Commission on Second-hand sales
New service provided in current year🏠 Daily Life Examples
1. Used Car Sale
When Raj sells his 5-year-old car to Priya, this sale is NOT counted in national income because the car was already counted when it was manufactured 5 years ago. But if they pay any commission or brokerage to a broker for arranging the sale then such brokerage will be included
2. Old Mobile Phone
If you sell your old smartphone on OLX, this transaction doesn't add to national income. However, the commission OLX earns IS counted as it's a new service.
3. Sale of house
Mr Raj constructed a house 10 years ago. In the current year he sold this house to Mr Vijay for Rs 50 Lakhs. Such sale is sale of second hand goods and hence Rs 50 Lacs is excluded from national income. But if Mr Raj and Mr Vijay pay brokerage to a broker of Suppose Rs 5 Lakhs for helping in this sale, then brokerage of Rs 5 lakhs will be included, as it is a new service
Financial Assets
Buying and selling shares, bonds, or debentures doesn't create new goods or services. These are just pieces of paper (or digital records) that represent ownership. When you buy a share, you're just changing who owns it - no new value is created!
EXCLUDED
Sale & Purchase of Shares, Bonds, Debentures
Just paper claims, no value additionINCLUDED
Brokerage & Commission
Service provided by brokers💼 Daily Life Examples
1. Stock Market Trading
When you buy 100 shares of Reliance from someone else, no new goods are produced. But the broker's commission for facilitating this trade is counted.
2. Government Bonds
Purchasing a government bond worth ₹10,000 doesn't add to national income, but the bank's service charge for processing the transaction is included.
3. Mutual Fund Investment
Suppose SBI mutual fund company sells you mutual funds worth Rs 10000, then this will not be included in national income as this is a mere paper claim. No production of goods or services has happened. But if SBI Mutual Fund charges some fees or charges on such mutual funds, then such fees or charges will be included in national income, not your investment amount
Intermediate Goods
We don't count the value of intermediate goods separately because they're already included in the final product's price. It can result into double counting and hence value of intermediate goods is subtracted from value of output. This is called Value Added
Key Point
At each stage we subtract intermediate consumption from the value of output, to avoid double counting.
🏭 Daily Life Examples
1. Bread Making
A bakery buys flour, sugar, and yeast to make bread. We Subtract value of these intermediate goods from the bread's sales value, to find value added or production.
2. Car Manufacturing
Steel, rubber, and glass are used to make cars. We subtract value of these intermediate goods from the Cars's sales value , to find value added or production.
3. Pizza Preparation
A restaurant uses tomatoes, cheese, and flour to make pizza. We subtract value of these intermediate ingredients from the pizza sales value , to find value added or production.
Services for self consumption
Services we do for ourselves at home are not counted because it's very difficult to put a price on them. How much would you pay yourself for cooking dinner or cleaning your room? These are called non-market transactions.
EXCLUDED
Self-Service Activities
Difficult to estimate market value👨👩👧👦 Daily Life Examples
1. Home Cooking
When your mother cooks delicious meals at home, this service isn't counted in national income because we can't easily determine its market value.
2. Kitchen Gardening
If you grow tomatoes and onions in your backyard for family consumption, this production isn't counted because it doesn't involve market transactions.
3. Home Tutoring
When a parent teaches their child mathematics at home, this educational service isn't counted, unlike hiring a professional tutor.
Imputed Values
Imputed (Assumed) values are included in national income for the following a) Own account production of goods of the producing units is included. b) Production for self consumption c) Rent on owner occupied houses. These are counted because even though not sold in market, but still production of goods or services have taken place.
INCLUDED - Imputed Values
Estimated values for non-cash transactions
🏘️ Daily Life Examples
1. Company Car Usage
If Tata Motors uses its own cars to transport employees, the value of such cars is estimated and included in national income even though not sold in the market.
2. Farmer's Own Consumption
When a wheat farmer keeps some wheat for his family's consumption instead of selling it, we estimate its market value and include it.
3. Owner-Occupied House
If you live in your own house, we estimate the rent you would have paid (like ₹15,000/month) and count it as income, just like rented houses.
Why Include These?
These have clear economic value and help us compare economies fairly. If we didn't count owner-occupied houses, countries with more renters would appear richer!
Illegal Activities
Income from illegal activities is not counted in national income calculations. This is because we don't have reliable data about these activities, and they're not part of the legal economy we want to measure.
EXCLUDED
Illegal Activities
No reliable data available⚖️ Daily Life Examples
1. Black Market Sales
Money earned from selling goods without proper licenses or tax payments is not counted in official national income statistics.
2. Unreported Cash Transactions
When businesses don't report cash sales to avoid taxes, this income doesn't appear in national income calculations.
3. Smuggling Activities
Income from smuggling goods across borders illegally is not included because it's not part of the legal economic system.
Important Note
This doesn't mean illegal activities don't affect the economy, but we can't measure what we can't see or verify through legal channels.
🎯 Quick Summary
Remember these precautions to avoid double counting and ensure accurate national income calculation. The value-added method focuses on measuring only the new value created in the current year through legal, measurable economic activities. Understanding these rules helps economists paint an accurate picture of a country's economic performance!
