What is Gross Value Added?
Gross Value Added (GVA) is an economic productivity metric that assesses the contribution of a corporate entity, company, or municipality to an economy, producer sector, or region. GVA helps quantify the dollar value for the amount of goods and services produced, minus the cost inputs and raw materials used in production. This metric refines gross domestic product (GDP) by factoring in subsidies and taxes on products.
Key Takeaways
- GVA Measures Contribution: It evaluates the contribution of entities such as corporate subsidiaries and governments to the economy.
- Adjusts GDP: GVA recalibrates GDP, making it a crucial indicator for understanding national economic wellbeing.
- Assesses Fixed Costs: Determining GVA helps businesses understand how much their products or services contribute to meeting fixed costs.
Understanding Gross Value Added (GVA)
GVA is derived by subtracting intermediate consumption from gross output, translating to the net output of the economy. This metric plays an integral role in calculating GDP, showcasing the economy’s overall health and productivity. At a broader level, GVA is valued over GDP or Gross National Product (GNP) because it incorporates both subsidies and taxes on products, offering a unique perspective on economic contributions.
GVA in Action
- National Perspective: Governments use GVA to measure total economic output and growth more effectively than GDP.
- Corporate Use: Companies calculate GVA to understand the net value added by products, services, or operational units, excluding fixed capital consumption and depreciation.
Formula for GVA
GVA = GDP + SP − TP
where:
SP = Subsidies on products
TP = Taxes on products
Gross Value Added Example
Consider a hypothetical scenario for the fictional country, Econland. We have the following economic data:
- Private consumption: $500 billion
- Gross investment: $250 billion
- Government investment: $150 billion
- Government spending: $250 billion
- Total exports: $150 billion
- Total imports: $125 billion
- Taxes on products: 10%
- Subsidies on products: 5%
Here’s a step-by-step calculation of the GVA:
Step 1: Calculate GDP
GDP = Private consumption + Gross investment + Government investment + Government spending + (Exports − Imports)
GDP = $500 billion + $250 billion + $150 billion + $250 billion + ($150 billion − $125 billion) = $1.175 trillion
Step 2: Determine Taxes and Subsidies on Products
- Subsidies on products: $500 billion * 5% = $25 billion
- Taxes on products: $500 billion * 10% = $50 billion
Step 3: Calculate GVA
Gross Value Added (GVA) = GDP + Subsidies − Taxes
GVA = $1.175 trillion + $25 billion − $50 billion = $1.15 trillion
How Does GVA Differ From GDP?
Gross domestic product (GDP) registry denotes the combined value of total goods and services produced within a geographical scope. GVA supplements this by accounting for product-specific taxes and subsidies to express true value additions.
What Is Value-Added for Companies?
Value-added denotes the economic uplift a company grants its products or services, illustrating why the end product sells higher than its production cost. This clarifies profits brought by their unique offerings to customers.
Understanding Cash Value Added
Cash Value Added (CVA) assesses profitability, emphasizing the necessity for returns to investors. Essentially, CVA is a variant of Economic Value Added (EVA), refining the insight into core profitability metrics.
Related Terms: Gross Domestic Product, GDP, Subsidies, Taxes, Economic Value Added.
References
- U.S. Bureau of Economic Analysis. “Gross Domestic Product”.
- U.S. Bureau of Economic Analysis. “What Is Industry Value Added?”
