The Output Approach

Topics: Value added, Economics, Measures of national income and output Pages: 1 (342 words) Published: March 17, 2011
The Output Approach
The Output Approach focuses on finding the total output of a nation by directly finding the total value of all goods and services a nation produces. Because of the complication of the multiple stages in the production of a good or service, only the final value of a good or service is included. This avoids an issue often referred to as "double counting" - when the total value of a good is included in the national output in several stages of production. In the example of meat production, the value of the good from the farm may be $10, then $30 from the butchers, and then $60 from the supermarket. The value that should be included in the national output should be $60, not the sum of all those numbers; $100. The method of National Income by Output, Value Added method:

GDP at market price = Value of Output in an economy in a particular year - Intermediate consumption

NNP at factor cost = GDP at market price - Depriciation + NFIA (Net Factor Income from Abroad) - Net Indirect Taxes [6]
The Income Approach
The Income Approach focuses on finding the total output of a nation by finding the total income of a nation. This is acceptable, because all money spent on the production of a good - the total value of the good - is paid to workers as income. The main types of income that are included in this measurement are rent (the money paid to owners of land), salaries and wages (the money paid to workers who are involved in the production process, and those who provide the natural resources), interest (the money paid for the use of man-made resources, such as machines used in production), and profit (the money gained by the entrepreneur - the businessman who combines these resources to produce a good or service). The equation for measurement of National Income by Income Method:

NDP at factor cost = compensation of employee + operating surplus + Mixed income of self employee...
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