Value added is a term used in national income accounting to measure the contribution made by each sector of the economy to the overall GDP. It refers to the difference between the value of goods or services produced by a sector and the cost of inputs used to produce those goods or services.

Calculation

To calculate value added, we subtract the cost of inputs (such as raw materials, labor, and energy) from the total value of goods or services produced by a sector. The result is the value added by that sector to the overall economy.

Importance

Value added is an important indicator of economic performance because it measures the real contribution of each sector to the economy. It helps in determining the productivity and efficiency of different sectors, and also helps in identifying the potential for growth and development.

Example

For instance, suppose a company produces a car that sells for $20,000. The cost of inputs, such as raw materials, labor, and energy, used to produce the car are $12,000. Therefore, the value added by the company is $8,000 ($20,000 - $12,000).

Conclusion

In conclusion, value added is a crucial element in national income accounting. It helps in measuring the actual contribution made by each sector of the economy to the overall GDP. It is calculated by subtracting the cost of inputs from the total value of goods or services produced by a sector.

Value-added in an industry refers to the difference between the total revenue of an industry and the total cost of inputs—the sum of labor, materials, and services—purchased from other businesses within a reporting period.