The United Nations System of National Accounts of 2008 defines Gross Value Added as the "value of output minus the value of intermediate consumption." It measures the contribution to growth made by an individual producer, an industry, or a sector.
Gross Value Added Significance
Gross Value Added (GVA) is significant since it tells us the value added to the cost incurred. It reveals the amount of value-added in each company, sector, and country.
It also helps deduce the economic activities from the supply or producer's side. GDP on the other hand taps the economy from the demand or consumer's side.
GVA is also highly relevant for policymakers in making sector-specific policies. It offers sector-wise classification of contribution or value addition and helps policymakers incentivize and provide subsidies to low-performing sectors. Also, it aids them in levying more tax from high-performing sectors.
GDP facilitates international economic comparison, which compares income levels, living conditions, and the overall financial status of different countries. On the other hand, GVA helps in inter-sectoral economic comparison by comparing the economic standing of sectors like agriculture, manufacturing, and services sector.
Procedure to Calculate Gross Value Added
One way to calculate Gross Value Added is to subtract the value of intermediate consumption from the total output.
GVA can also be calculated via GDP (Gross Domestic Product) when calculating at the macro level of a country's economy. GDP refers to the total value of the country's final goods and services produced.
GDP = Private consumption + Government spending + Gross investment + government investment + net foreign trade (Exports – imports)
Net taxes are the difference between taxes on a product and subsidies on the product. If you subtract net taxes on products from GDP results, you will get the value of GVA. The magnitude of product taxes and subsidies are determinants of the value of GDP.
GVA = GDP – NTP (Net Taxes on Products)
NTP = taxes on products – subsidies on products
Drawbacks of Gross Value Added
The accuracy of GVA is dependent on the quality of data and data sources. Reliable data sources result in a more accurate value of GVA.
Changes in data collection and calculation methods may lead to an overestimation or underestimation of GVA. On the other hand, standard methodology and data sources give more reliable value. GVA is vulnerable to employing unfitting and flawed methodologies.
To sum up, GVA (Gross Value Added) is the value-added to raw material/product or service in the production process during a period. GVA is the total output produced minus the intermediate consumption incurred.
Sometimes, Gross Value Added is better than GDP, since the latter does not always give correct measures about the status of a country's economy in terms of development.
A rise in GDP may happen due to a boost in tax collections. It may be due to stringent tax measures and the compliance of taxpayers. However, this rise in GDP does not correspond to the increase in actual output, whereas GVA will give you an idea regarding it.
FAQs on Gross Value Added
Q.1. Does Gross Value Added include tax?
Gross Value Added at factor cost does not include any tax, whereas GVA at Basic Price and GVA at market price include production tax and product tax.
Q.2. Is Gross Value Added a supply-side?
Yes, Gross Value Added is a supply-side. It informs about the economic status of a company, region, or country from the angle of supply or producer's perspective.
Q.3. How is GDP different from Gross Value Added?
Factor Cost, Basic Price, and Market Price are crucial in deciding the value of both Gross Value Added and GDP. Summing the value added by all the sectors with taxes on products and deducting subsidies on a product gives the value of GDP.
GDPMP = GVABP + Product taxes – Product subsidies
Q.4. What is Gross Value Added at market price?
GVAMP is Gross Value Added at market price. It includes product taxes and is bereft of product subsidies. Therefore, GVAMP is equal to GDPMP.