Added value (economy)
The term is difficult to define because of its wide range of uses in various economic areas such as business administration , finance and economics (especially macroeconomics ). In business administration, especially in supply chain management , value creation refers to the company and the value network that connects the companies. According to Rutherford, value is created through the activities of the company and its employees. It is measured as the difference between the market value of the goods produced by the company and the cost of these goods and the materials procured by other producers. This calculation excludes the contribution of other producers to the total value of the company's output so that it ultimately equates to the market value generated by the company. Value creation refers to the net contribution of each company to the total value of the production, which results from the summation of all individual contributions. By adding up all of these contributions, value added can be related to the economy. The term is then used in economics in the context of the domestic concept when considering the domestic production through the use of domestic and foreign production factors. This is used to measure the gross domestic product . The value-added data provide information about the proportion that an individual industry or company has contributed to overall economic performance. This can be used to make indirect statements about structural change .
Calculation of added value
In general, added value is described in the literature as the value by which the output exceeds the input , i.e. a dynamic (electricity) variable that arises through the transformation process. Achieving the highest possible operational added value ( profit ) should be the goal of economic action. If the input now permanently exceeds the output in terms of value, i.e. negative added value (reactive power) has arisen, this is extremely dangerous to the substance of the operation .
The added value results from the total output minus the preliminary work . Value creation is - in a money economy - the goal of productive activity. This transforms existing goods into goods with a higher monetary value.
Value creation in a manufacturing company
The creation of added value in a manufacturing company will now be explained using a production account. In this production account, the income and expenditure incurred through the production activity are shown. The gross value added, as a measure of the economic performance of a company in the company, is determined as follows:
or also (for economies with a state quota ):
Produktionswert − Vorleistungen − Abschreibungen − indirekte Steuern + Subventionen = Wertschöpfung
Through the use of production factors, goods and services that are to be sold are produced in the economic subject under consideration (in the manufacturing company) . The transactions associated with the production process are purchases of preliminary work, sales of finished products and payment of fees to the suppliers as factor services. A distinction must be made between production accounts with and without a state, depending on how the economy is viewed . When considering an economy with a state, taxes and subsidies must also be considered.
Production account of a manufacturing company:
|Expense side||Income side|
|1. Purchases of intermediate consumption from Germany and abroad||4. Sales to domestic and foreign economic agents, government and private households
= created output
|2. Depreciation||5. Positive changes in inventories of own products|
|3. Net added value||6. Self-made systems (means of production manufactured for own use)|
On the income side , the origin of the funds appears, thus always the company's sales , i.e. the amount of products sold valued at the product price. That's the company's revenue . Changes to the inventory of semi-finished and finished products as well as self-made systems also appear here.
Production value (also: gross production value) is the value of the sales of goods and services from own production as well as of commodities to other domestic and foreign economic entities, increased by the value of changes in inventories of semi-finished and finished products from own production and also increased by the Value of the self-created systems. The production value is therefore the assessed production result.
On the expense side, there are the company's expenses, i.e. the use of the funds. Accordingly, purchases of intermediate consumption appear as expenditure, which are necessary to transform the production factors into goods and services. Advance payments in this sense are:
- Raw materials and supplies
- Services obtained from other companies upstream of the production process. These can of course also be from foreign companies.
- Self-made systems that are used again in the same company.
- Fuels, commodities, transport costs, postage, legal fees, commercial rents, usage fees for public institutions, etc.
In addition, means of production (machines, buildings, building equipment) are used, the value of which decreases during the production process due to wear and tear. The consideration for the depreciation of the permanent means of production is valued in the form of depreciation and recorded in market prices. If you subtract the intermediate consumption and depreciation from the company's income, part of the financial resources should remain that was not spent on the production process. This net added value is the amount by which sales exceed expenses. Net value added generally consists of wages, salaries, interest, dividends, income from participations and profits. These components are distributed according to their recipients, for whom they in turn are income (wages and salaries are household income for work; interest, leases and rents are income for capital employed). These fees are called “factor income” because they are viewed as fees for the use of factor services. The remaining profit can then be distributed differently by the company, for example to shareholders .
The gross value added is the sum of depreciation and net value added or the production value minus intermediate consumption. This value indicates what value has been added to the intermediate consumption of the products and what contribution the company has made to the overall economic production of goods. Although the input gains in value, this increase in value in the production process is “bought” in part by the use-related depreciation of the means of production, through wear and tear.
|Energy producer||20 €|
|Barrel maker||5 €|
|Sum (final value of the beer)||100 €|
- Example: A keg of beer costs € 100 in retail.
- The brewery had the following costs for production: hops € 10, energy € 20, barrel € 5. The brewery sells the barrel of beer to a wholesaler for € 80 . The brewery has thus created an added value of 45 € per barrel (80 € income - 35 € costs). Of the € 45 added value, € 35 is used to cover wages and social benefits and € 5 is paid as taxes. So the remaining € 5 is profit. For the sake of simplicity, the inputs of the agricultural enterprise, the energy producer and the barrel manufacturer are neglected here. The wholesaler sells the barrel, which he bought for € 80, to the retailer for € 90 . The added value of the wholesaler is therefore € 10. The retailer sells the barrel for € 100 and creates an added value of € 10.
- The price of the end product can therefore be broken down into the added value that is created at every stage of production and trade .
Value added by the state
The creation of value added by the state becomes clear when looking at the state's production account. This has the same structure as the production account at the manufacturing company.
|Expense side||Income side|
|1. Advance payments||4. Services provided against payment.
5. Free services
= production value
|3. Net added value|
The production value on the income side is the result of paid and unpaid services provided . The services provided for a fee can be determined directly, since the prices for them are available. This is more problematic with the services provided free of charge, the state consumption. This is only calculated indirectly as the difference between the production value and the sales and thus reflects the production costs. The profit of the state is thus production value minus production costs. The state's net added value only consists of the factor pay for public employees (for their work). Since the expense and income of the government's production account are equal, the account cannot show any gains or losses from government production activities.
Value added in the national accounts
Value added to calculate GDP
In the national accounts , many flow and stock quantities, which represent the economic activities in a past period, are summarized. The concept of added value appears here in the production calculation of the domestic product calculation.
In the production approach all the contributions of the various economic agents in the respective sectors to be gross domestic product (GDP) recorded. The gross value added of an industry is therefore the difference between the output of the industry and the intermediate consumption from other industries. When calculating these amounts, intermediate consumption is deducted from the production value of the individual economic entity and all gross value added of the companies is added, which then results in the unadjusted gross value added.
|Production value of the 5 sectors|
|- advance payments|
|= Gross value added (unadjusted)|
|- Imputed fees for banking services|
|= Gross value added (adjusted)|
|+ Non-deductible sales tax|
|+ Import duties|
|= Gross domestic product at market prices|
|+ Balance of earned income and property income
between residents and the rest of the world
|= Gross national product at market prices|
|= Net national product at market prices|
|- indirect taxes|
|= Net national product at factor cost = national income|
The gross value added is unadjusted because it still includes the imputed fees for banking services, which are treated as intermediate consumption for economic entities. By deducting this, you get the adjusted gross value added. In order to get to the gross domestic product, the non-deductible sales tax and import duties must also be added to the total of the gross value added of the sectors.
The national income is the sum of all net added value, i.e. the income resulting from production activities. The national product includes all economic end products minus the raw materials and supplies from the total production result, i.e. the net yield of production (added value of all production factors in the period under consideration).
When the macroeconomic production account is broken down according to its origin, it indicates the value added in various sectors of the economy. This calculation shows the extent to which the various branches of the economy have contributed to the creation of the national product.
When adding up all actual sales in a period, the same services are recorded at different trading and production levels and are thus counted many times. That is why the summation of end products (products that are not resold) is used to calculate GDP. For example, a car should be counted as an end product and not the tires should be added together. In practice, double counting should be avoided by working with the added value. At each stage of the production process of a good, only the value added at this stage is calculated as part of GDP. In this way, all inputs are deducted from the end products. Some goods can be both an intermediate and an end product: If potatoes are sold directly to the consumer, they are an end product, if they are further processed to produce potato chips , then they are an intermediate product.
The gross national product does not include all economic activities in an economy. As an imperfect measure, it does not capture the added value of housework (for example baking a cake), child-rearing , the shadow economy (undeclared work, illegal work such as drug trafficking, etc.), the subsistence economy and the home improvement movement.
Oversubscription and signature of prizes
The free goods are valued at the prices at which they are traded on the market. These market prices can, however, under- or over-subscribe the actual value added. A large number of goods contain certain (indirect) tax components, for example gasoline . These excise taxes are hidden in market prices . These market prices with indirect taxes thus exaggerate the actual value added. The economic value of about a liter of gasoline is not € 1.50, but only around € 0.50 if the mineral oil tax is € 1 per liter. Prices have been signed for subsidized goods, which means that they are cheaper than they would be without government subsidies.
In order to compensate for these distortions, the market prices are adjusted for these state influences:
|Gross value added at market prices|
|- Sum of indirect taxes|
|+ Sum of subsidies|
|= Net added value|
Comparability problem due to changes in the price level
Due to possible changes in the price level , GDP changes without real value added changing. The different GDP values of the different years are difficult to compare. The inflationary development must be factored out in order to capture the real increase in value. This is done with the help of price indices , which represent the average price development between two points in time of goods and services that are summarized in a shopping cart.
Value creation in construction
The economic importance of the construction industry in Germany is just under 5% of the overall economic output. In the value chain of the construction industry, planning services play a central role as part of corporate services. As a net supplier for the construction industry, this area not only shows the highest proportion of the overall effect, but has also increased its share of the overall effect since 1995. This means that the actual construction process depends heavily on deliveries of the planning services. For example, the management and maintenance of construction works is the domain of the users. These are mainly companies from the non-construction sector and private households. In relation to a property, the added value is to be equated with the market value of the property. This means that the construction investment, maintenance costs and a possible increase in value are included in the generally positive market value.
Regional added value
If the added value is related to a geographical area, one speaks of regional added value. The regional added value is defined as the totality of the services of a region as well as the benefits generated in the region for the municipalities , minus the services provided by other regions. The decentralized energy transition offers the potential to strengthen this regional added value. Local authorities can collect more taxes and duties through increased local private-sector added value . This can lead to an improvement in the budgetary position. New jobs can be created. Positive non-monetary side effects such as sustainability , citizen participation , tourism , energy autonomy and environmental protection can also increase the attractiveness of a region. Possible measures to increase regional added value include: B. the integration of local value chains , the avoidance of import costs for fossil fuels or the repurchase of energy transmission networks.
- Reiner Clement and Wiltrud Terlau: Fundamentals of Applied Macroeconomics . Verlag Franz Vahlen Munich, Munich 1998.
- Dieter Brümmerhof: National accounts . 4th edition, Oldenbourg Verlag, Munich 1992.
- Klaus Schaper: Macroeconomics - A Textbook for Social Sciences . Campus Verlag, Frankfurt 2001.
- Olivier Blanchard and Gerhard Illing: Macroeconomics . 3rd, updated edition. Pearson Studium, Munich 2004, ISBN 3-8273-7051-5 .
- Michael S. Aßländer : From vita activa to industrial value creation: A social and economic history of human work , Metropolis 2005, ISBN 3-89518-510-8 .
- B. A. Rutherford: Value Added as a Focus of Attention for Financial Reporting: Some Conceptual Problems. In: Accounting and Business Research. 7, 1977, p. 215, doi : 10.1080 / 00014788.1977.9728707 , based on Ruggles & Ruggles (1965). In the original: "The value added by a firm; ie the value created by the activities of the firm and its employees, can be measured by the difference between the market value of the goods that have been turned out by the firm and the cost of those goods and materials purchased from other producers. This measure will exclude the contribution made by other producers to the total value of this firm's production, so that it is essentially equal to the market value created by this firm. The value added measure assesses the net contribution made by each firm to the total value of production; by adding up all these contributions. "
- Michael C. Burda and Charles Wyplosz: Macroeconomics . Vahlen's Handbooks of Economics and Social Sciences, Vahlen, 1994.
- Regional added value use of renewable energies. Renewable Energy Agency, accessed on August 24, 2015 (PDF; 1.75 MB).