Correct Option
The correct option is 2 only
Explanation
The Product Method, also known as the Value Added Method, calculates National Income by aggregating the value added by all producing units within an economy during a specific period. It focuses on the production side of the economy to avoid the error of double counting.
Statement-wise Analysis
- Statement 1 is Incorrect: The Product Method measures the Gross Domestic Product (GDP) by summing up the Gross Value Added (GVA) of all firms or production units in the economy. Mathematically, GDP is the sum total of GVA across all sectors.
- Statement 2 is Correct: Value added is defined as the value of production of the firm minus the value of intermediate goods used. Intermediate goods are inputs used up in the production process. Adding them would lead to double counting. The formula is:
Value Added = Value of Output - Intermediate Consumption. - Statement 3 is Incorrect: The net contribution made by a firm (Value Added) is not retained entirely by the entrepreneur. Instead, it is distributed among the four factors of production: wages to labor, rent to land, interest to capital, and profit to the entrepreneur. The entrepreneur retains only the profit component.
Key Takeaway
Key Takeaway: In the Product Method, National Income is derived by summing the Value Added (Output minus Intermediate Consumption) of all sectors, which is then distributed as income among the factors of production.