The product (value added) method

The product method adds up the value added by every firm. A firm's value added = value of its production − value of the intermediate goods it used.

Example: a farmer grows wheat worth ₹100 (using no inputs) and sells it to a baker. The baker makes bread worth ₹250. The farmer adds ₹100; the baker adds ₹250 − ₹100 = ₹150. Total value added = ₹250, exactly the value of the final good. Adding the sales of both (₹350) would count the wheat twice.

• Gross value added (GVA) includes depreciation.
• Net value added (NVA) = GVA − depreciation.

Firms do not always sell all they produce. The unsold goods add to their inventories (stocks). Change in inventories = production − sales. It is treated as investment by the firm: planned if the firm meant to build up stock, unplanned if sales simply fell short of expectations.

So: GVA = sales + change in inventories − intermediate goods used. For example, sales 500, inventories up by 40, intermediate goods 200: GVA = 500 + 40 − 200 = 340.

GDP is the sum of the gross value added of all the firms in the economy.