Gross value added


In economics, gross value added is the measure of the value of goods and services produced in an area, industry or sector of an economy. "Gross value added is the value of output less the value of intermediate consumption; it is a measure of the contribution to GDP made by an individual producer, industry or sector; gross value added is the source from which the primary incomes of the SNA are generated and is therefore carried forward into the primary distribution of income account."

Relationship to gross domestic product

GVA is a very important measure, because it is used to determine gross domestic product. GDP is an indicator of the health of a national economy and economic growth. It represents the monetary value of all products and services produced in the country within a defined period of time. "In comparing GVA and GDP, we can say that GVA is a better measure for the economic welfare of the population, because it includes all primary incomes. From the point of view of the society as a whole GDP, despite its disadvantages, is probably a better measure for economic growth and welfare, because it includes also net taxes which are the financial basis for the collective consumption of the society."
The relationship between GVA and GDP is defined as:
As the total aggregates of taxes on products and subsidies on products are only available at whole economy level, Gross value added is used for measuring gross regional domestic product and other measures of the output of entities smaller than a whole economy.
Restated,

GVA at different levels

GVA can be used for measuring of the contribution to GDP made by an individual producer, industry or sector. For instance, to analyze the productivity of the market sector one can use GVA per worker or GVA per hour. The measure preferred by the Organisation for Economic Cooperation and Development’s in the Productivity Database is GVA per hour.
At the company level GVA refers to the net income of a produced particular good. "In other words, the gross value added number reveals and potentially creating a bottom-line profit. Once the consumption of fixed capital and the effects of depreciation are subtracted, the company knows how much net value a particular operation adds to its bottom line."

Disadvantages of GVA

Over-simplistically, GVA is the grand total of all revenues, from final sales and subsidies, which are incomes into businesses. Those incomes are then used to cover expenses, savings, and taxes.
GVA is sector specific, and GDP is calculated by summation of GVA of all sectors of economy with taxes added and subsidies are deducted.