(i) From the following data, calculate Net Value Added at Factor Cost (NVA_FC) : (ii) Why there is a need to make distinction between final and intermediate goods ? (i) Discuss briefly the concept of ‘Externalities’, with suitable example. (ii) Export are not a part of ‘Net Factor Income from abroad’. Elaborate the reason behind the given statement.

Question

Accepted Answer

(i) NVA_FC = Value of Output - Intermediate Consumption - Depreciation. This is the standard formula from the Value Added Method. NVA_FC represents the net contribution of an enterprise to the flow of goods and services after accounting for intermediate inputs and wear and tear of capital.

(ii) Final goods are those meant for final use by consumers or for investment. Intermediate goods are used up completely in the production process within the same year. The distinction is necessary to avoid double counting. As explained in the chapter, a commodity passes through various stages of production, and when value is taken at each stage, it includes the cost of inputs more than once.

Externalities are benefits or harms caused by an activity for which no payment is received or penalty imposed. Positive externalities (e.g., public park) increase welfare, while negative externalities (e.g., pollution) decrease welfare. GDP does not account for externalities, making it an imperfect measure of welfare.