Product Method

Product method is known by different names. Some of the more names are Net output method, Industrial-origin method, Flow-of-product method, Value-added method, etc.

Product method measures the national income by estimating the contribution of each producing enterprise in the domestic territory of the country in an accounting year.

Two steps as follows are involved in estimating the national income.

1.    First Step: It involves identification and classification of productive enterprises.
The various enterprises are grouped in three sectors:
-    Primary sector, i.e., agriculture and allied activities,
-    Secondary sector, i.e., manufacturing, construction, etc.,
-    Tertiary sector, i.e, services of various types.

Following goods and services are included in production:

•    Goods and services that are sold in the market with a view to earn profits.

•    Goods and services not sold in the market, but that are supplied free or at a nominal rate (e.g., free lunch to Scholl children or employees in a company).

•    Produced goods which fail to reach the market and hence are not sold (these are also known as own-use production or own-account production goods).

•    Own-account production of fixed assets by government, business enterprises and households.

•    Imputed rent of owner-occupied houses and the value of the domestic and personal services rendered by the paid domestic staff.

The following activities are excluded from production:

•    Domestic services rendered within the household by the members of the household
•    Leisure time activities
•    Illegal activities.

Domestic services provided by a housewife (and other family members) are definitely economic in nature, but still we exclude them from production.

These services are economic in the sense because-
•    their production requires the sue of scarce resources; and

•    their value can be estimated since similar services are bought and sold in the market.
But these services are not included in production for the following reasons:

•    These activities have a very limited repercussion on the rest-of-the economy.

•    Since these services are not produced with the aim of earning income, their valuation is difficult.

2.    Second Step: It involves measurement of value of output. The single major problem here is to avoid double counting.
For every producer, his product is a final product, but not so for a national income accountant. For a farmer, the process of production ends immediately he has harvested his crop of cotton. But we know cotton is not the final product. Cotton services as a raw material to produce yarn. Yarn too is not a final product. Yarn is used to produce cloth. Cloth too is not a final product. Cloth is used to produce ready-made garments which are sold for final consumption to household. TH output of cloth includes the value the total domestic product we would be overstating it simply because of multiple countries of different intermediate goods and final product.

There are two alternative approaches to solve this problem. One, we need include only the values of the final product, i.e., those goods which go for final consumption for  capita formation. We need not include the value of intermediate goods.

Alternatively, we can find out the net value-added at different stages of products of a commodity. The sum of net value-added at different stages of production of a commodity in the economy will given us the estimate of domestic factor income in the economy.

In short, the two apaches are:
A.    Final-output method, wherein only final goods and services are counted and all intermediate consumptions are ignored.

B.    Value-added method, wherein only the value added by each productive enterprise at different stages of production is included and summed up.

A.    The final-output method helps us reach the estimate of GDP_FC as follows:
                               GDP_MP = Value of consumers goods and services
                                             + Gross private domestic investment
                                             + Value of output of the government sector.

Once the estimates of GDP_MP have been derived, other aggregates like GNP_FC NNP_FC GDP_FC, GNP_FCNDP_FC, Private income, personal income, personal disposable income, etc., can be made.

B.    According to the Value-added method,

Cross value added at = Value added in primary sector
Market price                  + Value added in secondary sector
                                       + Value added in tertiary sector.

or
Gross domestic product at
market price (GDP_MP )
From GDP_MP we can derive any other aggregate.

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