We take the summation of market value of all final goods and services produced both inside and outside the national border of an economy during a year.
According to W.C. Peterson,
We take the current market value of all final goods and services produced by the economy during an income period regardless of where the output is produced.
Symbolic Representation – Output Formula
Y = P1 Q1 + P2 Q2 + ……….+ Pn Qn
Y = National income
P = Units of output (i.e., Goods & Services)
PQ = Market value
Precautions while using Output Approach
To avoid the miscalculation of national income, we should take the following precautions under this approach:
Inclusion of Income
The income of countrymen working abroad should be included in national.
Exclusion of Income
The income of foreigners working within the national border of another country should not be induced in national income. For example, if a China’s resident works temporarily in Pakistan, his income is the part of national income of China, and not of Pakistan’s national income.
Risk of Double Counting
Market Value of Particular Year
Market value of goods and services should be taken only for that particular year in which these have been produced.
Depreciation allowance should be omitted.
Free and unpaid services like self-gardening, house wife’s services etc should not be included in national income accounting.
Indirect taxes like sales tax etc. should not be included.
Subsidies should be included in national income accounting.
Second Hand Goods
The market value of second hand goods like old houses, old
automobiles should not be included in national
There are three stages of production of goods, i.e. primary stage,
The value-added approach is a technique in which
According to value-added approach, we should add up only net additional value, i.e., 100+100+100 = $300. It is equal to the price of the final stage.
Otherwise, it will be 100+200+300 = 600 (which is double to the actual price).