Using the National Output for Calculating National Income
A final method which is more direct is the "output method" or the value added approach. This involves adding up the total contributions made by the various sectors of the economy. "Value Added" is the value added by each industry to the raw materials or processed products that it has bought from other industries before passing on the product to the next stage in the production process. This approach therefore centres on final products. Final products will include capital goods as well as consumer goods since while intermediate goods are used up during the period in producing other goods, capital goods are not used up (apart from "wear and tear" or depreciation) during the period and may be thought of as consumer goods "stored up" for future periods.
Final output will include "subsistence output", which is simply the output produced and consumed by households themselves. Because subsistence output is not sold in the market, some assumption has to be made to value them at some price. We also take into account the final output of government, which provides services such as education, medical care and general administrative services. However, since state education and other governmental services are not sold on the market we shall not have market prices at which to value them. The only obvious means of doing this is to value public services at what it costs the government to supply them, that is, by the wages bill spent on teachers, doctors, and the like. When calculating the GDP in this matter it is necessary to avoid double counting.