What Is Value Added?
Value added is the increase in value of a product or service at each stage of production, calculated as revenue minus the cost of purchased goods and services. It represents the true contribution to GDP by a firm or industry, reflecting value generated through labor and capital.
Key Aspects of Value Added
- Formula: Value added = Revenue (gross output) - Purchased goods/services (intermediate consumption)
- Components: It consists of compensation for employees (wages), taxes on production/imports (minus subsidies), and gross operating surplus (profits)
- Purpose: It measures the actual economic activity of an entity without duplicating the value of intermediate inputs already counted in earlier stages.
- Aggregation: The sum of all value added in a country equals GDP
Specific Value Added
- Specific value added is the part of (general) value added with high asset specificity. That is, it excludes non-asset specific parts like production facilities and labor that can be, e.g., outsourced to other parties without major difficulty.
- Asset specificity refers to the degree to which an investment (physical, human, or location-based) is customized for a specific transaction or partner and loses value if redeployed elsewhere.