Value added is a term in

economics Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interac ...

for calculating the difference between

market value Market value or OMV (open market valuation) is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or '' fair market value'', although t ...

of a product or service, and the sum value of its constituents. It is relatively expressed by the supply-demand curve for specific units of sale. Value added is distinguished from the

accounting Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...

term

added value {{One source, date=June 2010 Added value in financial analysis of shares is to be distinguished from value added. It is used as a measure of shareholder value, calculated using the formula: :Added Value = The selling price of a product - the cost ...

which measures only the financial profits earned upon transformational processes for specific items of sale that are available on the market. In business, ''total value added'' is calculated by tabulating the ''unit value added'' (measured by summing unit

profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory inter ...

— the difference between sale price and production cost, unit

depreciation In accountancy, depreciation refers to two aspects of the same concept: first, an actual reduction in the fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wears, and second, the allocation i ...

cost, and unit

labor cost Labour or labor may refer to: * Childbirth, the delivery of a baby * Labour (human activity), or work ** Manual labour, physical work ** Wage labour, a socioeconomic relationship between a worker and an employer ** Organized labour and the lab ...

) per each unit sold. Thus, total value added is equivalent to

revenue In accounting, revenue is the total amount of income generated by the sale of product (business), goods and services related to the primary operations of a business. Commercial revenue may also be referred to as sales or as turnover. Some compan ...

minus

intermediate consumption Intermediate consumption (also called "intermediate expenditure") is an economic concept used in national accounts, such as the United Nations System of National Accounts (UNSNA), the US National Income and Product Accounts (NIPA) and the Europe ...

. Value added is a higher portion of revenue for integrated companies (e.g. manufacturing companies) and a lower portion of revenue for less integrated companies (e.g. retail companies); total value added is very nearly approximated by compensation of employees, which represents a return to labor, plus

earnings before taxes In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses (operating and non-operating) except interest expenses and income tax expenses. Operating income and operat ...

, representative of a return to capital.

Definition

microeconomics Microeconomics is a branch of economics that studies the behavior of individuals and Theory of the firm, firms in making decisions regarding the allocation of scarcity, scarce resources and the interactions among these individuals and firms. M ...

, value added may be defined as the market value of aggregate output of a transformation process, minus the market value of aggregate input (or aggregate inputs) of a transformation process. One may describe value added with the help of

Ulbo de Sitter Lamoraal Ulbo de Sitter (6 March 1902 – 12 May 1980) was a Dutch geologist at Leiden University, where he was the founder of the school of structural geology. De Sitter was known for his research on the geology of the Alps and Pyrenees. Hi ...

's design theory for production synergies. He divides transformation processes into two categories, parts and aspects. Parts can be compared to timeline stages, such as first preparing the dish, then washing it, then drying it. Aspects are equated with area specialization, for example that someone takes care of the part of the counter that consists of glass, another takes care of the part that consists of plates, a third takes care of cutlery. An important part of understanding value added is therefore to examine delimitations. In

macroeconomics Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study topics such as output (econ ...

, the term refers to the contribution of the factors of production (i.e. capital and labor) to raise the value of the product and increase the income of those who own the said factors. Therefore, the national value added is shared between capital and labor. Outside of business and economics, value added refers to the economic enhancement that a company gives its products or services prior to offering them to the consumer, which justifies why companies are able to sell products for more than they cost the company to produce. Additionally, this enhancement also helps distinguish the company's products from those of its competitors.

National accounts

The factors of production provide "services" which raise the unit price of a product (X) relative to the cost per unit of intermediate goods used up in the production of X. In

national accounts National accounts or national account systems (NAS) are the implementation of complete and consistent accounting Scientific technique, techniques for measuring the economic activity of a nation. These include detailed underlying measures that ...

, such as the

United Nations System of National Accounts The System of National Accounts or SNA (until 1993 known as the United Nations System of National Accounts or UNSNA) is an international standard system of concepts and methods for national accounts. It is nowadays used by most countries in the w ...

(UNSNA) or the United States

National Income and Product Accounts The national income and product accounts (NIPA) are part of the national accounts of the United States. They are produced by the Bureau of Economic Analysis of the Department of Commerce. They are one of the main sources of data on general econ ...

(NIPA),

gross value added In economics, gross value added (GVA) is the measure of the value of goods and service (economics), services produced in an area, industry or sector of an economy. "The ''gross value added'' is the Value of output (economy), value of output minus t ...

is obtained by deducting intermediate consumption from

gross output In economics, gross output (GO) is a measure of the value of production of new goods and services during an accounting period. Gross output represents the total value of ''sales'' by producing enterprises (their gross revenue or turnover) in an ac ...

. Thus gross value added is equal to

net output Net output is an accounting concept used in national accounts such as the United Nations System of National Accounts (UNSNA) and the NIPAs, and sometimes in corporate or government accounts. The concept was originally invented to measure the to ...

. Net value added is obtained by deducting

consumption of fixed capital Consumption of fixed capital (CFC) is a term used in business accounts, tax assessments and national accounts for depreciation of fixed assets. CFC is used in preference to "depreciation" to emphasize that fixed capital is used up in the process ...

(or depreciation charges) from gross value added. Net value added therefore equals gross

wages A wage is payment made by an employer to an employee for work done in a specific period of time. Some examples of wage payments include compensatory payments such as ''minimum wage'', '' prevailing wage'', and ''yearly bonuses,'' and remune ...

, pre-tax profits net of depreciation, and

indirect taxes An indirect tax (such as a sales tax, per unit tax, value-added tax (VAT), excise tax, consumption tax, or tariff) is a tax that is levied upon goods and services before they reach the customer who ultimately pays the indirect tax as a part of ma ...

less subsidies.

Value added tax

Value-added tax A value-added tax (VAT or goods and services tax (GST), general consumption tax (GCT)) is a consumption tax that is levied on the value added at each stage of a product's production and distribution. VAT is similar to, and is often compared wi ...

(VAT) is a

tax A tax is a mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax co ...

on sales. It is assessed incrementally on a product or service at each stage of production and is intended to tax the value that is added by that production stage, as outlined above by unit value added.

References

External links

What Does Value Add Mean?

{{Authority control Financial economics Valuation (finance) Marxian economics National accounts Business terms

Definition

National accounts

Value added tax

See also

References

Further reading

External links