Value added: Difference between revisions
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{{Other uses|Value-added (disambiguation)}} |
{{Other uses|Value-added (disambiguation)}} |
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{{Short description|The difference between input value and market value}} |
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{{Multiple issues| |
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'''Value added''' is a term in [[financial economics]] for calculating the difference between [[market value]] of a product or service, and the sum value of its constituents. It is relatively expressed to the [[demand curve|supply-demand]] curve for specific units of sale.<ref>{{cite web |title=Value-Added Product: What It Means in Industry and Marketing |url=https://www.investopedia.com/terms/v/valueadded.asp |publisher=Investopedia |access-date=14 April 2023}}</ref> It represents a [[economic equilibrium|market equilibrium]] view of [[production (economics)|production economics]] and [[financial analysis]]. Value added is distinguished from the [[accounting]] term [[added value]] which measures only the financial profits earned upon transformational processes for specific items of sale that are available on the market. |
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{{Cleanup|reason=the article is skewed towards [[Marxism]] and lacks actual substance|date=March 2013}} |
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{{Lacking overview|date=March 2013}} |
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{{More footnotes|date=July 2009}} |
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}} |
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{{short description|Sum of unit profit, unit depreciation cost and unit labor cost}} |
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| ⚫ | In business, ''total value added'' is calculated by tabulating the ''unit value added'' (measured by summing unit [[Profit (accounting)|profit]] — the difference between [[Price|sale price]] and [[production cost]], unit [[depreciation]] cost, and unit [[Direct labor cost|labor cost]]) per each unit sold. Thus, total value added is equivalent to [[revenue]] minus [[intermediate consumption]].<ref>{{Cite web|title=International Economics Glossary: V|url=http://www-personal.umich.edu/~alandear/glossary/v.html|access-date=2021-05-17|website=www-personal.umich.edu}}</ref><ref name=":0">{{Cite web|title=What does value added mean?|url=https://www.definitions.net/definition/value+added#:~:text=In%20business,%20the%20difference%20between,is%20the%20unit%20value%20added.|access-date=2021-05-17|website=www.definitions.net}}</ref> Value added is a higher portion of revenue for [[Integrated business planning|integrated companies]] (e.g. manufacturing companies) and a lower portion of revenue for less integrated companies (e.g. retail companies); total value added is very nearly approximated by [[compensation of employees]], which represents a return to labor, plus [[earnings before taxes]], representative of a return to capital.<ref name=":0" /><ref name="Kansas">{{cite web |title=Value Added: Opportunities and Strategies |url=https://www.agmanager.info/sites/default/files/VALADD10%25202col.pdf |publisher=Kansas State University |access-date=14 April 2023}}</ref> |
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| ⚫ | In |
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| ⚫ | Outside of business and economics, value added refers to the economic enhancement that a company gives its products or services prior to offering them to the consumer, which justifies why companies are able to sell products for more than they cost the company to produce. Additionally, this enhancement also helps distinguish the company's products from those of its competitors.<ref>{{Cite web|last=Hayes|first=Adam|date=2020-08-28|title=Why Value-Added Matters|url=https://www.investopedia.com/terms/v/valueadded.asp |
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| ⚫ | In [[microeconomics]], value added may be defined as the market value of aggregate output of a transformation process, minus the market value of aggregate [[factors of production|input]] (or aggregate inputs) of a transformation process. One may describe value added with the help of [[Ulbo de Sitter]]'s design theory for production synergies. He divides transformation processes into two categories, parts and aspects. Parts can be compared to timeline stages, such as first preparing the dish, then washing it, then drying it. Aspects are equated with area specialization, for example that someone takes care of the part of the counter that consists of glass, another takes care of the part that consists of plates, a third takes care of cutlery.<ref name="Kansas" /><ref>{{cite book |last1=Sitter |first1=Sitter, L.U. de |title=Synergetisch Produceren |date=1994 |publisher=van Gorcum |isbn=978-90-232-3365-7 |url=https://books.google.com/books?id=erdVqyi_gHQC&dq=Sitter%2C+L.U.+de%2C+%281994%29.+Synergetisch+Produceren.+Assen%3A+van+Gorcum.&pg=PA1}}</ref> An important part of understanding value added is therefore to examine delimitations. |
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Value added is distinguished from the [[accounting]] term [[added value]] which measures only the financial profits earned upon transformational processes for specific items of sale that are available on the market. |
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| ⚫ | Outside of business and economics, value added refers to the economic enhancement that a company gives its products or services prior to offering them to the consumer, which justifies why companies are able to sell products for more than they cost the company to produce. Additionally, this enhancement also helps distinguish the company's products from those of its competitors.<ref>{{Cite web|last=Hayes|first=Adam|date=2020-08-28|title=Why Value-Added Matters|url=https://www.investopedia.com/terms/v/valueadded.asp|access-date=2021-05-17|website=Investopedia|language=en}}</ref> |
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==National accounts== |
== National accounts == |
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{{Main articles|National accounts#Main components}} |
{{Main articles|National accounts#Main components}} |
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The factors of production provide "services" which raise the unit price of a product (X) relative to the cost per unit of [[Intermediate consumption|intermediate goods]] used up in the production of X. |
The factors of production provide "services" which raise the unit price of a product (X) relative to the cost per unit of [[Intermediate consumption|intermediate goods]] used up in the production of X. |
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In [[national accounts]], such as the [[United Nations System of National Accounts]] (UNSNA) or the United States [[National Income and Product Accounts]] (NIPA), [[gross value added]] is obtained by deducting intermediate consumption from [[gross output]]. Thus gross value added is equal to [[net output]]. Net value added is obtained by deducting [[consumption of fixed capital]] (or depreciation charges) from gross value added. Net value added therefore equals gross [[wages]], pre-tax profits net of depreciation, and [[indirect taxes]] less subsidies. |
In [[national accounts]], such as the [[United Nations System of National Accounts]] (UNSNA) or the United States [[National Income and Product Accounts]] (NIPA), [[gross value added]] is obtained by deducting intermediate consumption from [[gross output]]. Thus gross value added is equal to [[net output]]. Net value added is obtained by deducting [[consumption of fixed capital]] (or depreciation charges) from gross value added. Net value added therefore equals gross [[wages]], pre-tax profits net of depreciation, and [[indirect taxes]] less subsidies. |
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==Differences between Marxist and neoclassical accounting of value added== |
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A difference between Marxist theory and conventional national accounts concerns the interpretation of the distinction between ''new'' value created, transfers of value and ''conserved value'', and of the definition of "[[Gross domestic product|production]]". |
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For example, Marxist theory regards the "imputed rental value of owner-occupied housing" which is included in GDP as a ''fictitious'' entry; if the housing is owner-occupied, this housing cannot also yield real income from its market-based rental value at the same time. |
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In the 1993 manual of the United Nations System of National Accounts (UNSNA), the concept of "imputed rental value of owner occupied housing" is explained as follows: |
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"6.89. Heads of household who own the dwellings which the households occupy are formally treated as owners of unincorporated enterprises that produce housing services consumed by those same households. As well-organized markets for rented housing exist in most countries, the output of own-account housing services can be valued using the prices of the same kinds of services sold on the market in line with the general valuation rules adopted for goods or services produced on own account. In other words, the output of the housing services produced by [[owner-occupier]]s is valued at the estimated rental that a tenant would pay for the same accommodation, taking into account factors such as location, neighborhood amenities, etc. as well as the size and quality of the dwelling itself. The same figure is recorded under [[household final consumption expenditure]]s." |
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Marxist economists object to this accounting procedure on the ground that the monetary imputation made refers to a flow of income which does not exist, because most home owners do not rent out their homes if they are living in them. |
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Another important difference concerns the treatment of property rents, land rents and real estate rents. In the Marxian interpretation, many of these rents, insofar as they are paid out of the sales of current output of production, constitute part of the new value created and part of the real cost structure of production. They should therefore be included in the valuation of the net product. This contrasts with the conventional national accounting procedure, where many property rents are excluded from new value-added and net product on the ground that they do not reflect a productive contribution. |
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{{Main|Value added tax}} |
{{Main|Value added tax}} |
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[[Value-added tax]] (VAT) is a [[tax]] on sales. It is assessed incrementally on a product or service at each stage of production and is intended to tax the value that is added by that production stage, as outlined above by unit value added. |
[[Value-added tax]] (VAT) is a [[tax]] on sales. It is assessed incrementally on a product or service at each stage of production and is intended to tax the value that is added by that production stage, as outlined above by unit value added. |
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==See also== |
== See also == |
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*[[Bang for the buck]] |
*[[Bang for the buck]] |
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==References== |
== References == |
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{{Reflist}} |
{{Reflist}} |
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== Further reading == |
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* Alan Deardorff ''[http://www-personal.umich.edu/~alandear/glossary/ Deardorff's Glossary of International Economics]'' (Click "V' for "Value added.") |
* Alan Deardorff ''[http://www-personal.umich.edu/~alandear/glossary/ Deardorff's Glossary of International Economics]'' (Click "V' for "Value added.") |
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*Edgar Z. Palmer, ''The meaning and measurement of the national income, and of other social accounting aggregates''. |
*Edgar Z. Palmer, ''The meaning and measurement of the national income, and of other social accounting aggregates''. |
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*M. Yanovsky, ''Anatomy of Social Accounting Systems''. |
*M. Yanovsky, ''Anatomy of Social Accounting Systems''. |
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==External links== |
== External links == |
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* [http://www.sideroad.com/Sales_Techniques/value-add-sales.html What Does Value Add Mean?] |
* [http://www.sideroad.com/Sales_Techniques/value-add-sales.html What Does Value Add Mean?] |
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* [http://humanresources.about.com/od/glossaryv/g/value_add.htm Value Add - Your Value Add is what Matters to Your Company] |
* [http://humanresources.about.com/od/glossaryv/g/value_add.htm Value Add - Your Value Add is what Matters to Your Company] |
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* http://www.isixsigma.com/dictionary/value-added/ |
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{{Authority control}} |
{{Authority control}} |
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{{DEFAULTSORT:Value Added}} |
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[[Category:Financial economics]] |
[[Category:Financial economics]] |
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[[Category:Valuation (finance)]] |
[[Category:Valuation (finance)]] |
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Latest revision as of 20:04, 29 September 2023
Value added is a term in financial economics for calculating the difference between market value of a product or service, and the sum value of its constituents. It is relatively expressed to the supply-demand curve for specific units of sale.[1] It represents a market equilibrium view of production economics and financial analysis. Value added is distinguished from the accounting term added value which measures only the financial profits earned upon transformational processes for specific items of sale that are available on the market.
In business, total value added is calculated by tabulating the unit value added (measured by summing unit profit — the difference between sale price and production cost, unit depreciation cost, and unit labor cost) per each unit sold. Thus, total value added is equivalent to revenue minus intermediate consumption.[2][3] Value added is a higher portion of revenue for integrated companies (e.g. manufacturing companies) and a lower portion of revenue for less integrated companies (e.g. retail companies); total value added is very nearly approximated by compensation of employees, which represents a return to labor, plus earnings before taxes, representative of a return to capital.[3][4]
Definition[edit]
In microeconomics, value added may be defined as the market value of aggregate output of a transformation process, minus the market value of aggregate input (or aggregate inputs) of a transformation process. One may describe value added with the help of Ulbo de Sitter's design theory for production synergies. He divides transformation processes into two categories, parts and aspects. Parts can be compared to timeline stages, such as first preparing the dish, then washing it, then drying it. Aspects are equated with area specialization, for example that someone takes care of the part of the counter that consists of glass, another takes care of the part that consists of plates, a third takes care of cutlery.[4][5] An important part of understanding value added is therefore to examine delimitations.
In macroeconomics, the term refers to the contribution of the factors of production (i.e. capital and labor) to raise the value of the product and increase the income of those who own the said factors. Therefore, the national value added is shared between capital and labor.[3]
Outside of business and economics, value added refers to the economic enhancement that a company gives its products or services prior to offering them to the consumer, which justifies why companies are able to sell products for more than they cost the company to produce. Additionally, this enhancement also helps distinguish the company's products from those of its competitors.[6]
National accounts[edit]
The factors of production provide "services" which raise the unit price of a product (X) relative to the cost per unit of intermediate goods used up in the production of X.
In national accounts, such as the United Nations System of National Accounts (UNSNA) or the United States National Income and Product Accounts (NIPA), gross value added is obtained by deducting intermediate consumption from gross output. Thus gross value added is equal to net output. Net value added is obtained by deducting consumption of fixed capital (or depreciation charges) from gross value added. Net value added therefore equals gross wages, pre-tax profits net of depreciation, and indirect taxes less subsidies.
Value added tax[edit]
Value-added tax (VAT) is a tax on sales. It is assessed incrementally on a product or service at each stage of production and is intended to tax the value that is added by that production stage, as outlined above by unit value added.
See also[edit]
References[edit]
- ^ "Value-Added Product: What It Means in Industry and Marketing". Investopedia. Retrieved 14 April 2023.
- ^ "International Economics Glossary: V". www-personal.umich.edu. Retrieved 2021-05-17.
- ^ a b c "What does value added mean?". www.definitions.net. Retrieved 2021-05-17.
- ^ a b "Value Added: Opportunities and Strategies" (PDF). Kansas State University. Retrieved 14 April 2023.
- ^ Sitter, Sitter, L.U. de (1994). Synergetisch Produceren. van Gorcum. ISBN 978-90-232-3365-7.
{{cite book}}: CS1 maint: multiple names: authors list (link) - ^ Hayes, Adam (2020-08-28). "Why Value-Added Matters". Investopedia. Retrieved 2021-05-17.
Further reading[edit]
- Alan Deardorff Deardorff's Glossary of International Economics (Click "V' for "Value added.")
- Edgar Z. Palmer, The meaning and measurement of the national income, and of other social accounting aggregates.
- Paul A. Samuelson and William D. Nordhaus (2004) Economics. "Glossary of Terms," Value added.
- Anwar Shaikh & Ahmet Ertugrul Tonak, Measuring the Wealth of Nations. CUP.
- M. Yanovsky, Anatomy of Social Accounting Systems.
