Question

Explain any two precautions pertaining to the Value Added Method of Estimation of National Income in a country.

Hint:

Be cautious of double counting and ensure that only market transactions are included in the estimation of national income.

Answer 1

The Value Added Method of National Income estimation involves calculating the value added at each stage of production. However, there are certain precautions to be kept in mind while using this method:
1. Double Counting: Care should be taken to avoid double counting. This occurs when the value of intermediate goods is included in the value of final goods. Only the value added at each stage of production should be counted, not the value of intermediate goods used in the production process.
2. Exclusion of Non-Market Transactions: Non-market transactions, such as household work or services provided without monetary exchange, should not be included in the calculation of national income. Only market transactions involving the exchange of goods and services should be considered.
These precautions are necessary to ensure that the calculation of national income is accurate and reflects the actual productive activity in the economy.