BusinessEconomy

Output Approach

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

Where

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

To avoid the risk of double counting of national income, either market value of final goods should be taken or value added approach should be under taken.

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

Depreciation allowance should be omitted.

Free Services

Free and unpaid services like self-gardening, house wife’s services etc should not be included in national income accounting.

Indirect Taxes

Indirect taxes like sales tax etc. should not be included.

Subsidies

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 income accounting.

There are three stages of production of goods, i.e. primary stage, secondary / intermediate stage and final stage. It is quite possible that a good may pass through all these stages within a year. If we take the market value at every stage, there will be over-estimation of national income. To avoid this, market value of final stage should be taken.

The value-added approach is a technique in which net addition to the total value due to next stage is added up. By following this approach, the risk of double counting of NI is avoided For example, a chair is $.100, USD $200 and USD $300 at primary, secondary and final stage respectively.

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).

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Back to top button
Close