Production Method: This method measures the national income by taking the value of final goods and services produced by the different industrial sectors of the economy.

Steps of Measurement:

i) Classify all the production units- It means grouping production units into different sectors in the domestic (or economic) territory. The production units are classified into primary, secondary and tertiary sectors.

ii) Estimate NVA_FC of each industrial sector by taking the following sub-steps-

(A) Estimate gross value of output: Gross value of output (GVO) is the total worth of goods produced .It can be estimated in two ways:

(a) As sum of sales and net addition to stocks

Value of output = Sales + change in stock

Where, Change in stock = Closing stock – Opening stock

(b) Quantity of output multiplied by price.

Value of output = Price × Quantity

(B) Estimate value of intermediate consumption and deduct the same from gross value of output (GVO) to arrive at GVA_MP.

Gross value added (GVA_MP) = GVO - Intermediate consumption

(C) Estimate consumption of fixed capital (depreciation) and deduct it from GVA_MP to arrive at NVA_MP .

NVA_MP = GVA_MP - consumption of fixed capital (depreciation)

(D) Find out net indirect tax by subtracting subsidies from indirect taxes (NIT= indirect tax – Subsidies) and deduct it from NVA_MP to arrive at NVA_FC of an industrial sector.

NVA _FC = NVA_MP – Net Indirect Tax (NIT)

iii)Take the sum of NVA _FC of all the production units of all the industrial sectors of the economy to get NDP_FC.

NDP_FC =Σ NVA _FC 

iv) Estimate net factor income from abroad and add the same to NDP_FC to get the NNP _FC or national income.

NNP _FC (N.I) = NDP FC + Net factor income from abroad (NFIFA)

Precautions: While estimating national income by the production method / value added method the following precautions must be taken:

i) Avoid double counting of output.

ii) Value of own-account production should be included in total output. 

iii) The value of intermediate goods should not be included. 

iv) Do not include sale of second hand goods.