Class - 12
Topic - Value Added Method
Classify the following as intermediate or final goods;
Q.1) A car purchased by a household.
E
Solution: A car purchased by household is final good because the household is the final user of the car
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and no value is to be added to the car.
ER
Q.2) Furniture purchased by a school
Solution: Furniture purchased be school is a final product because school is the final user of the
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furniture and no value is added to it.
Q.3) Machines purchased by dealers of machines
M
Solution: Machines purchased by dealer of machines is an intermediate good because machines are
O
resold by the firms to make profits or value is to be added
Q.4 Chalks, dusters, etc. purchased by school;
C
Solution: Chalks, dusters etc. purchased by school are intermediate goods as these are used up in the
process of value addition during the year.
T
Q.5) Expenditure on maintenance of an office building;
PG
Solution: Expenditure on maintenance of school building is an intermediate expenditure as it adds
value to the building and are used during the period of one year.
Q.6) Paper purchased by the publisher;
,
Solution: Paper purchased by the publisher is an intermediate goods as paper is used for further
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production during the same year.
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Value Added Method
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a) This is the best and perfect approach to avoid the problem of double counting.
b) In this method, instead of taking the value of final goods, value added by each firm at each stage
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is included.
A) Value of Output = Sales + Addition to stock + Self consumed
Domestic Exports Closing stock
Sale s ( -)
E
Opening stock
C
Firms Households Government
ER
M
B) Intermediate Consumption: Purchase of raw material
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Imports Domestic purchases
O
C
Firms Governments
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PG
(A B) GVAMP
( ) Depreciation
NVAMP FC = NDPFC
( ) Net indirect taxes + NFIFA
,
NVAFC NNPFC
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Example No.1
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S. No. Contents ₹ (In lakhs)
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i) Sales Tax 20
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ii) Sales 400
iii) Purchase of Raw Materials 250
iv) Excise Duty 30
v) Change in stock (-) 40
vi) Import of Raw Material 12
vii) Depreciation 9
Sol. Gross Value Added at factor Cost (GVAFC) = Value of Output (Sales + Change in Stock) –
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Purchase of Raw Materials – Indirect Tax (Sales Tax + Excise Duty)
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= [400 + (-40)] – 250 – (20+30)
ER
= 400 – 340 = ₹ 60 lakh
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Example No.2
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S. No. Contents ₹ (In lakhs)
i)
ii)
Depreciation
Intermediate Cost O 20
90
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iii) Subsidy 5
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iv) Sales 140
PG
v) Exports 7
vi) Change in Stock (-) 10
,
vii) Import of Raw Material 3
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Sol. Gross Value Added at factor Cost (NVAFC) = Value of Output (Sales + Change in Stock) –
Intermediate Cost – Depreciation – Indirect Tax
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= [140 + (-10)] –90 –20 – (-5)
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= 140 – 110 + 5
= 30 + 5 = ₹ 35 lakh
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Example No.3
S. No. Contents ₹ (In lakhs)
i) Price per Unit of Output 25
ii) Output Sold (Units) 1000
iii) Excise Duty 5000
iv) Depreciation 1000
E
v) Change in Stock (-) 500
C
vi) Intermediate Cost 7000
ER
Sol. Gross Value Added at factor Cost (NVAFC) = (Price per Unit of Output Output Sold) + Change in
Stock - Intermediate Cost – Depreciation - Excise Duty
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= (25 1000)-500-7000-1000-5000
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= 25000-13500
= 11500 crore
O
C
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, PG
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Example No.4
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S. No. Contents ₹ (In lakhs)
i) Net Value Added at Factor Cost 560
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ii) Depreciation 60
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iii) Change in Stock (-) 30
iv) Intermediate Cost 1000
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v) Exports 200
vi) Indirect Taxes 60
Sol. Gross Value Added at Market Price (GVAMP) = NVAFC +NIT+ Depreciation
= 560+60+60
= ₹ 680 lakh
NIT = Indirect Tax –Subsidies = 60-0 = ₹ 60 lakh
GVAMP = Value of Output (Sales + Change in stock) - Intermediate Cost
Sales = 680+1000+30 = ₹ 1710 lakh
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Example No.5
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S. No. Contents ₹ (In lakhs)
ER
i) Value of Output 200
ii) Net Value Added at Factor Cost 80
iii)
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Sales Tax 15
iv) Subsidy 5
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v) Depreciation 20
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Sol. Intermediate Consumption = Value of Output - Net Value Added at Factor Cost (NVAFC) +
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Depreciation + (Sales Tax-Subsidy)
= 200-[80 + 20 + (15-5)]
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= ₹ 90 lakh
, PG
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hi
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