Question

Explain any two precautions to be kept in mind while estimating National Income by the Value Added method.

Hint:

Give two precautions with reasons: leave out intermediate goods to avoid double counting, and leave out second-hand goods because they are not part of current production.

Answer 1

Step 1: Understand the method:
In the Value Added method, we add the value added by every producing unit in the domestic territory. Value added = value of output - value of intermediate consumption.
A precaution is a rule that keeps the estimate free from errors such as double counting. We explain any two precautions.

Step 2: Precaution 1: Do not include intermediate goods:
Intermediate goods are used up in making other goods in the same year. Examples are cotton for a cloth mill and flour for a bakery.
Their value is already part of the value of the final good. If we count them again, the same value is counted twice. This is called double counting and it makes national income too high.
So we count only the value added at each stage, or only the final goods.

Step 3: Precaution 2: Do not include second-hand goods:
A second-hand car or an old house was counted in the year it was first produced.
Its resale does not add anything to the current flow of goods and services, so it is left out of the estimate.
Only the commission or service charge earned by the dealer in the sale is counted, because the dealer renders a current service.

Final Answer:
Two precautions in the Value Added method: (1) the value of intermediate goods is not counted, to avoid double counting; (2) sale and purchase of second-hand goods is not counted, as it adds nothing to the current flow of goods and services.