Precautions for Product Method or Value Added Method:
There are certain precautions which are to be taken to avoid miscalculation of national income using this method. These in brief are:
- Problem of double counting:- When we add up the value of output of various sectors, we should be careful to avoid double counting. This pitfall can be avoided by either counting the final value of the output or by including the extra value that each firm adds to an item.
- Value addition in particular year:- While calculating national income, the values of goods added in the particular year in question are added up. The values which had previously been added to the stocks of raw material and goods have to be ignored. GDP thus includes only those goods, and services that are newly produced within the current period.
- Stock appreciation:- Stock appreciation, if any, must be deducted from value added. This is necessary as there is no real increase in output.
- Production for self consumption:- The production of goods for self-consumption should be counted while measuring national income. In this method, the production of goods for self-consumption should be valued at the prevailing market prices.