In national income accounting, value added by a firm can be determined in which of the following ways?

Introduction / Context:
This question deals with the concept of value added, which is central to national income accounting and to avoiding double counting when measuring GDP. Each firm in the production chain buys intermediate goods and services from other firms and sells final or further processed goods. Value added helps us separate the contribution of each firm to the overall value of output, so that we count each stage properly without counting the same goods multiple times.

Given Data / Assumptions:

• A firm purchases intermediate goods and services as inputs for production.
• The firm then sells its output either to final consumers or to other firms as further intermediate goods.
• We want a definition of value added that matches national income accounting practice.
• Options include output minus intermediate inputs, tax and subsidy sums, wages times quantities, export import differences, and depreciation with inventories.

Concept / Approach:
Value added by a firm is defined as the value of its output minus the value of intermediate goods and services purchased from other firms. This measure captures the new value that the firm creates through its own activities, such as labour effort, capital use, and organisation. When we sum the value added of all firms in the economy, we obtain GDP at basic prices, without double counting any intermediate product. Tax and subsidy payments, exports, imports, and depreciation are important for other accounting adjustments, but they do not by themselves define value added at the firm level.

Step-by-Step Solution:
Step 1: Recall that if we simply added the value of all firm sales, we would count intermediate goods many times.Step 2: To avoid this, we calculate value added as the value of sales minus the cost of intermediate inputs purchased from other firms.Step 3: This difference represents the contribution of the firm through wages, profits, interest, and depreciation.Step 4: The option that matches this idea is the one specifying output value minus intermediate cost.Step 5: Other options mention unrelated combinations of taxes, exports, imports, and depreciation which do not equal value added.

Verification / Alternative check:
As a simple example, imagine a wheat farmer sells wheat to a flour mill for 50 units of currency. The mill then produces flour and sells it to a bakery for 80. The bakery makes bread and sells it to consumers for 120. If we added all sales we would get 50 + 80 + 120 = 250, which double counts intermediate goods. Instead, calculate value added: the farmer value added is 50 (no intermediate inputs assumed), the mill value added is 80 − 50 = 30, and the bakery value added is 120 − 80 = 40. Total value added is 50 + 30 + 40 = 120, which equals the final bread sale. This demonstrates how the value added method works and confirms the definition in the correct option.

Why Other Options Are Wrong:
Adding indirect taxes and subsidies does not yield the firm value added; taxes and subsidies are separate adjustments for moving between basic prices and market prices. Multiplying quantity of output by the wage rate gives a wage bill for labour, not the total value added, which also includes profit, rent, and interest. Subtracting exports from imports produces net exports for a country or an industry, not value added by an individual firm. Adding depreciation to closing inventories is part of capital and stock accounting, but does not measure the new value created in the production process.

Common Pitfalls:
A typical mistake is to confuse value of output with value added and to think that sales revenue alone reflect the contribution of a firm. This leads to double counting when intermediate goods are used. Another pitfall is to assume that value added equals only wages or only profit, ignoring other factor incomes. To avoid confusion, always remember the simple rule: value added equals value of output minus value of intermediate inputs, and total GDP equals the sum of value added across all firms in the economy.

Final Answer:
Value added can be determined by subtracting the cost of intermediate goods and services from the value of the firm output.