Page 25 - DECO402_Macro Economics

Macroeconomic Theory

Notes This is equal to the market value of bread, which is final product or sum of value addition of various
stages of production. By using of value addition is saved from problem of double counting. Due to
this properties of value addition, it can be used widely in dates of national income. To find out the
value addition by a firm from total production value of that firm subtracted the cost of intermediate
goods. Means

Value Addition = value of Production – cost of intermediate goods

Table 1 clarifies the concept of value addition

Value Added Approach

Stages of Production Value of Output Cost of Intermediate Value Added
goods
1. Wheat 400 - 400
2. Flour 600 400 200
3. Bread 800 600 200
4. Sell of bread 900 800 100
Total 2,700 1,800 900
It has been assumed in above table that at wheat producing time, there is no cost of intermediate
goods. Therefore, by farmer value addition is equal to his value of product means ` 400. flour mill
buys wheat in ` 400 and making it flour, sell in ` 600. Flourman ` 600 – ` 400 = ` 200 value addition.
Beckeryman bought flour in ` 600 and making it bread, sold it to shopkeeper in ` 800. backeryman
value added ` 800 – ` 600 = ` 200 and sell bread to shopkeeper in ` 800. shopkeeper suld double bread
to consumer in ` 900. Thus value addition by shopkeeper ` 900 – ` 800 = ` 100. Therefore total value
addition is equal to ` 400 + ` 200 + ` 200 +` 100 = ` 900. If in it each step of production value addition
is added then it will be ` 400 + ` 600 + ` 800 + ` 900 = ` 2700. The value of wheat and flour will be
double counted. To escape from double counting value addition method in followed.
GDP IS estimated by adding up Value Addition by all the producing units in the economy.
MP
Thus GDP = ΣGVA
MP MP
Generally value addition has been done by primary, secondary and tertiary sector of economy, we
estimate separately. Therefore, such that in the whole context of economy these sectors relative
importance can be found out.
After the estimation of GDP we by following adjustment find out NNP (National income)
MP
FC
GDP MP – Net Indirect Taxes = GDP – Depreciation = NDP + Net Factor Income from Abroad =
FC
FC
NNP or Nation Income.
FC
(2) Income Method
For the calculation of national income by income method, factors of production for their producer
service get emolument or total sum of income is added. Broadly in its emoluments of labour in the
form wage, land emolument on tax, capital emolument in interest and entrepreneurship emolument
in profit. If factor income can not be recognized separately then by Mixed Income (i.e., combination of
rate, interest, profit and wages) national income is find out. Such is in economy’s non-organised sector
(or non-corporation sector ) where factor of production is self owned. Its service can not obtained from
market on rent. Income method is called Distributed Share Method of Factor Payment Method.

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