Question 6 of 36intermediate💡 UnderstandEssay2 marks

Discuss with your teacher how you could calculate the total value of a good or service by using the method of value added at each stage.

Correct Answer

To calculate the total value of a good or service using the value added method, we add the value added at each stage of production rather than adding the total value at each stage. This helps avoid double counting.

For example, a farmer sells wheat to a flour mill for Rs 20 per kg. The mill sells flour to a biscuit company for Rs 25 per kg. The biscuit company sells biscuits to consumers for Rs 80. Using the value added method: Farmer's value added = Rs 20, Mill's value added = Rs 5 (Rs 25 - Rs 20), Biscuit company's value added = Rs 55 (Rs 80 - Rs 25). Total value = Rs 20 + Rs 5 + Rs 55 = Rs 80. This total equals the value of final goods (biscuits at Rs 80), which already includes the value of all intermediate goods used in production.

Exercise: LET’S WORK THESE OUT | Q: 3 | (Page 6)
For More Understanding

Explanation

The textbook explains that intermediate goods like wheat and flour are used up in producing final goods like biscuits. The value of final goods already includes the value of all intermediate goods. If we count intermediate goods separately, we would be counting the same value multiple times (double counting). The value added method solves this by calculating only the additional value created at each stage.

Solution Steps

  1. Step 1: Identify the selling price at each production stage from the context

  2. Step 2: Calculate value added at each stage by subtracting input cost from output value

  3. Step 3: Sum all value added amounts: Rs 20 + Rs 5 + Rs 55 = Rs 80

  4. Step 4: Verify that total value added equals the final good's value (Rs 80 for biscuits)

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