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 - Purchased goods/services
- Components: It consists of compensation to 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.
- Specific value-added is equal to gross profit in corporate accounts. It is what economists use to represent corporate value-added.