Question

(a) State any two precautions that must be taken into consideration while estimating national income by value added method. 

(b) In an economy, following transactions took place. Calculate value of output and value added by Firm B: 

i. Firm A sold to firm B goods of Rs. 80 crore; to firm C Rs. 50 crore; to household Rs. 30 crore and goods of value Rs.10 crore remains unsold 

ii. Firm B sold to firm C goods of Rs.70 crore; to firm D Rs.40 crore; goods of value Rs. 30 crore were exported and goods of value Rs. 5 crore was sold to government. 

Answer 1

(a) Precautions of value added method are: 

(i) Value of sale and purchase of second hand goods is not considered while estimating value added as the value of second hand goods is already accounted during the year they were produced. 

(ii) Value of intermediate goods is not included in the estimation of value added because value of intermediate goods is reflected in the value of final goods. 

(b) Value of output of firm B = Sales of firm B to firm C + Sales of firm B to firm D + Exports + Sales of firm B to Government 

= 70 + 40 + 30 + 5 

 = Rs.145 crores 

Value Added by Firm B = Value of output by Firm B – Purchases by Firm B from firm A 

= 145 - 80 

= Rs. 65 crore.