Production approach

The production approach is also called as Net Product or Value added method. This method consists of three stages:

1 Estimating the Gross Value of domestic Output in various economic activities;

2 Determining the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services;

3 Deducting intermediate consumption from Gross Value to obtain the Net Value of Domestic Output.

Symbolically,

Gross Value Added = Value of output – Value of Intermediate Consumption.

Value of Output = Value of the total sales of goods and services + Value of changes in the inventories.

The sum of Gross Value Added in various economic activities is known as GDP at factor cost.

GDP at factor cost plus indirect taxes less subsidies on products is GDP at Producer Price.

For measuring gross output of domestic product, economic activities (i.e. industries) are classified into various sectors. After classifying economic activities, the gross output of each sector is calculated by any of the following two method

1 By multiplying the output of each sector by their respective market price and adding them together;

2 By collecting data on gross sales and inventories from the records of companies and adding them together;

Subtracting each sector's intermediate consumption from gross output, we get sectoral Gross Value Added (GVA) at factor cost. We, then add gross value of all sectors to get GDP at factor cost'. Adding indirect tax less subsidies in GDP at factor cost, we get GDP at Producer Prices.