Product Method or Output Method: This method is also called as Inventory Method. According to this method economy is divided into various sectors like agriculture, mining, manufacturing, small enterprises, commerce, transport, communication, etc.
National income by this method can be calculated by either valuing all final goods and services produced during a year at their market price or by adding up all values at each higher stage of production, until these products are turned into final products.
In output method there are two approaches to measure national income.
(1) Final Goods Approach I Final Product Approach : According to this approach, value of all final goods and services produced in primary, secondary and tertiary sector are included and the value of all intermediate transactions are ignored.
2. Value Added Approach I Value Added Method: To avoid double-counting, the value added approach is used to estimate the National Income. According to this method, it is necessary to obtain the total of value-added at each stage in the manufacture of a commodity to arrive at Gross National Product.
The value-added method can be explained by means of a simple example.
(a) In the above example, value of groundnut with shell is 50, after removing shells value of groundnut is 80, after crushing groundnut the value is 120 and when oil is packed in the packets its value is 150.
To avoid double-counting either the value of final output or the value – added should be taken in estimation of National Income.
The output method is widely used in the underdeveloped countries. In India, this method is applied in agriculture, mining and manufacturing sector.
Precautions:
- Avoid Double Counting: The value of only final goods and services must be considered and not the value of raw – materials or intermediary goods, etc.
- Self Consumption Goods: Goods used for self-consumption by farmers should be included in National Income.
- Price Level Changes to be considered: The values of national output must be expressed in terms of prices in some base year to know the national output in real terms i.e. N.I. at constant price.
- Net Income from Abroad: Care should be taken to include net income from abroad in National Income.
- Depreciation: Depreciation of capital assets should be deducted from the value of gross investment during the year.
- Indirect Taxes and Subsidies: To get National Income, deduct the indirect tax from the market price and add subsidies.
- Second-Hand Goods: Sale and purchase of second-hand goods should be ignored as it is not a part of current production.
