Value added

Value added is an economic concept that represents the additional value created at a particular stage of production. It is calculated by subtracting the cost of inputs from the value of outputs. The concept is used in various fields such as economics, business, and accounting.

Definition

Value added is the difference between the selling price of a product and the cost of materials and services purchased to produce it. It represents the additional value created by a company's activities. In other words, it is the value that a company adds to its inputs before selling them as outputs.

Calculation

The calculation of value added involves subtracting the cost of raw materials, energy, services and other inputs from the total sales revenue. The formula is:

Value Added = Output - Intermediate Consumption

Where:

• Output is the total value of goods and services produced by a company.
• Intermediate Consumption is the value of goods and services consumed in the production process.

Importance

Value added is an important measure of economic activity. It helps to understand the contribution of different sectors and companies to the overall economy. It is also used to calculate Gross Domestic Product (GDP), which is a key indicator of economic performance.

Value Added in Different Fields

Economics

In economics, value added is used to measure the contribution of different sectors to the economy. It is also used to calculate GDP. The concept of value added helps to avoid double counting in the calculation of GDP.

Business

In business, value added is used to measure the performance of a company. It helps to understand how much value a company adds to its inputs. It is also used to calculate the Value Added Tax (VAT), which is a type of consumption tax.

Accounting

In accounting, value added is used to measure the profitability of a company. It is calculated by subtracting the cost of goods sold from the total sales revenue. It helps to understand the efficiency of a company's operations.

See Also

• Gross Domestic Product
• Value Added Tax
• Cost of Goods Sold