Product Method (Value Added Method)

1. Value of Output
Value of Output = Sales + (Closing Stock − Opening Stock)

Sales = Value of goods and services sold during the year

Change in Stock = Closing Stock − Opening Stock

→ It gives the total value of goods and services produced during a year.

2. Gross Value Added at Market Price (GVAmp)

GVA = Value of Output − Intermediate Consumption

Intermediate Consumption = Value of raw materials, electricity, fuel,

and other inputs purchased from other firms.
→ Measures the value added by each producer before considering taxes or
depreciation.

3. Net Value Added at Market Price (NVAmp)

NVA = GVA − Depreciation

Depreciation = Wear and tear or reduction in the value of fixed capital

goods.
→ Depreciation is deducted to get “net” value.

4. Net Value Added at Factor Cost (NVAfc)

NVA = NVA − Net Indirect Taxes
or
NVA = NVA − (Indirect Taxes − Subsidies)

Net Indirect Taxes (NIT) = Indirect Taxes − Subsidies

Factor Cost = Cost of production including rewards to factors of
production (labour, land, capital, and enterprise).
→ Converts “market price” to “factor cost.”

5. Gross Domestic Product at Market Price (GDPmp)

GDP = ∑GVA of all production units in the domestic territory
→ Sum of value added by all domestic producers.

6. Gross Domestic Product at Factor Cost (GDPfc)

GDP = GDP − Net Indirect Taxes

→ Converts GDP at market price into GDP at cost of production (factor

cost).

7. Net Domestic Product at Factor Cost (NDPfc)

(Also called Domestic Income)
NDP = GDP − Depreciation

or equivalently,
NDP = ∑NVA of all sectors
→ Shows total income generated by domestic factors.
Net National Product at Factor Cost (NNP𝒇𝒄)
(Also known as National Income)
𝑁𝑁𝑃 = 𝑁𝐷𝑃 + 𝑁𝐹𝐼𝐴

where
𝑁𝐹𝐼𝐴 = Factor Income from Abroad − Factor Income to Abroad

→ Adds or subtracts income received

/sent abroad to arrive at total national income.
Relationship Between All Major Concepts
𝐺𝑉𝐴 = 𝑉𝑂 − 𝐼𝐶
𝐺𝐷𝑃 = ∑𝐺𝑉𝐴
𝐺𝐷𝑃 = 𝐺𝐷𝑃 − 𝑁𝐼𝑇
𝑁𝐷𝑃 = 𝐺𝐷𝑃 − 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝑁𝑁𝑃 = 𝑁𝐷𝑃 + 𝑁𝐹𝐼𝐴

→ Therefore:
National Income (NNPFC) = Σ NVAFC + NFIA
Step-by-Step of Calculation

Step Formula Description

Value of Output = Sales + (Closing Total value of goods &

1
Stock – Opening Stock) services produced

GVAmp = Value of Output – Value added by each

2
Intermediate Consumption producing unit

Net value added at market

3 NVAmp = GVAmp – Depreciation
price

NVAfc = NVAmp – (Indirect Taxes – Net value added at factor

4
Subsidies) cost
Step Formula Description

National income by product

5 NDPfc = Σ NVAfc
method

Di erence Between Market Price and Factor Cost

Basis At Market Price (MP) At Factor Cost (FC)

Factor cost means the

Market price means the
income received by factors
price paid by consumers in
of production (labour, land,
Meaning the market, which includes
capital, and enterprise) for
indirect taxes and excludes
producing goods and
subsidies.
services.

Includes: Indirect Taxes

Includes / Includes: Subsidies
(like GST)
Excludes Excludes: Indirect Taxes
Excludes: Subsidies

The actual earning or cost

The final market value of of production for the
Shows
goods and services. producers (factors of
production).

National Income at FC National Income at MP

Formula Relation = National Income at MP = National Income at FC
− Net Indirect Taxes + Net Indirect Taxes

Wages + Rent + Interest +

Wages + Rent + Interest +
Components Profit + Indirect Taxes –
Profit (only factor incomes)
Subsidies

From the producer’s

From the consumer’s
viewpoint — what they
Perspective viewpoint — what they pay
receive as payment for
in the market.
factors of production.
Basis At Market Price (MP) At Factor Cost (FC)

Suppose a pen’s market

price = ₹120, which At FC = ₹120 − ₹20 (NIT) =
Example
includes ₹20 GST. Then: ₹100
At MP = ₹120

Used when calculating Used when calculating

Use in
GDP or GVA at market National Income (NDPFC
Macroeconomics
price (GDPMP or GVAmp). or NVAfc).

In Simple Words:
 Market Price → What consumers pay (includes taxes).
 Factor Cost → What producers earn (excludes taxes, adds
subsidies).

Conversion Formula
National Income at FC
= National Income at MP − (Indirect Taxes − Subsidies)

or
NI at MP = NI at FC + (Indirect Taxes − Subsidies)
Expenditure Method

There are three methods to calculate National Income (GDP):

1. Production method → looks at value added by each producer.
2. Income method → looks at income received by factors of production.
3. Expenditure method → looks at total spending on final goods &
services.
Now, this topic is about the Expenditure Method, which focuses on the
demand side — i.e., how much is spent on goods and services in the
economy.

What is Expenditure Method?

 It measures GDP by adding up all the final expenditures made on
goods and services within a country in a year.
 It focuses on the demand or expenditure side (who buys the goods).
Final expenditure means spending on goods for final use, not for resale or
further production.

Example:
Imagine:
 Farmer produces wheat and sells it to baker for ₹50.
 Baker uses wheat to make bread and sells bread to customers for
₹200.
Now, which expenditures count for GDP?

What is Counted in
Who buys? Type Why?
bought? GDP?

Wheat from Used for further

Baker Intermediate No
farmer (₹50) production

Bread from
Consumers Final Yes Final use
baker (₹200)

So, GDP = ₹200 (bread) + ₹50 (if farmer sells directly to households) = ₹250.
But if farmer only sells to baker (not to consumer), GDP = ₹200, because
baker’s sale already includes the value of wheat.
Key idea: Only final expenditures are included to avoid double counting.

Components of Final Expenditure

Each firm (i) earns revenue from four types of final expenditures:

Type Symbol Who Spends It? Meaning

(a) Final consumption Households Spending on goods &

Ci
expenditure (mainly) services for final use

(b) Final investment Spending on capital goods

Ii Firms
expenditure (machines, buildings, etc.)

(c) Government Spending on goods &

Gi Government
expenditure services for public use

Spending on goods
(d) Export expenditure Xi Foreigners
produced in our country

So, total revenue for one firm =

RVi = Ci + Ii + Gi + Xi
Summing for All Firms
If there are N firms in the economy:
𝐺𝐷𝑃 = 𝛴𝑅𝑉𝑖 = 𝛴(𝐶𝑖 + 𝐼𝑖 + 𝐺𝑖 + 𝑋𝑖)

When we add them all up:

𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 + 𝑋

But wait — some of this spending might be on imports (M) — goods

produced outside the country.

Adjusting for Imports

Suppose:
 Some consumption goods are imported → Cm
 Some investment goods are imported → Im
 Some government goods are imported → Gm
Then, the total imports (M) = Cm + Im + Gm.
Since we only want goods produced within the country, we must subtract
imports.
So,
𝐺𝐷𝑃 = (𝐶 − 𝐶𝑚) + (𝐼 − 𝐼𝑚) + (𝐺 − 𝐺𝑚) + 𝑋

Simplify:
𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 + 𝑋 − 𝑀

This is the standard formula for GDP by Expenditure Method.

Final GDP Formula

𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 + (𝑋 − 𝑀)
 Income Method:
Every rupee spent in an economy (expenditure) becomes someone else’s
income.
So, the total expenditure on final goods = total income earned by all
factors of production.
That means:
GDP can be measured either by adding all final expenditures
(Expenditure Method) or by adding all factor incomes (Income Method).

Factors of Production and Their Incomes

Firms earn revenue by selling goods.
They then distribute that revenue among the people who helped in
production — the factors of production:

Factor of Production Income Type Symbol Example

Labour Wages & Salaries Wi Workers’ salaries

Capital Interest Ini Payment to banks, lenders

Land Rent Ri Rent for using land/building

Entrepreneurship Profit Pi Profit earned by owners

So for each household (i), total income = Wi + Pi + Ini + Ri

Formula
If there are M households in the economy:

𝐺𝐷𝑃 = Σ (𝑊𝑖 + 𝑃𝑖 + 𝐼𝑛𝑖 + 𝑅𝑖)

Or simply:
𝐺𝐷𝑃 = 𝑊 + 𝑃 + 𝐼𝑛 + 𝑅
Where:
 W = Total wages and salaries
 P = Total profits
 In = Total interest
 R = Total rents
This formula shows GDP from the income side — that is, how income is
distributed among people for their contribution in production.

Combining All Three Methods

We now have:

Method Formula Perspective

Supply side – value added by

Product (Output) Method GDP = Σ GVAi
producers

Expenditure Method GDP = C + I + G + X – M Demand side – total spending

Distribution side – total factor

Income Method GDP = W + P + In + R
incomes

Hence,
𝑮𝑫𝑷 = 𝚺𝑮𝑽𝑨𝒊 = 𝑪 + 𝑰 + 𝑮 + 𝑿–𝑴 = 𝑾 + 𝑷 + 𝑰𝒏 + 𝑹

Calculation of GDP using three methods (Example)

Let’s take the textbook example with two firms: A and B

Firm Product Sales (₹) Intermediate Goods Used Value Added (₹)

A Cotton 50 0 50

B Cloth 200 50 (cotton from A) 150

Firm Product Sales (₹) Intermediate Goods Used Value Added (₹)

Total GDP 200

So, GDP by Product Method = 50 + 150 = 200

GDP by Expenditure Method

Only final goods (cloth) are sold to consumers for ₹200.
GDP = ₹200

GDP by Income Method

Firms distribute their revenue to factors of production:

Firm Wages (₹) Profits (₹) Total (₹)

A 20 30 50

B 60 90 150

Total GDP 80 120 200

So, GDP = 80 (Wages) + 120 (Profits) = 200

Conclusion:
All three methods give the same GDP (₹200), because they measure the
same thing — the total value of goods and services — but from di erent
angles.
Think of it like a full circle:

Stage What Happens Method Used

Production Firms produce goods and add value Product Method

Goods are bought by households, Expenditure

Expenditure government, etc. Method

Revenue from sales is paid to workers,

Distribution Income Method
landowners, investors

So,
Production → Expenditure → Income → (back to Production)
That’s the circular flow of income in the economy.