In our article Q1 GDP contraction: why, role of agriculture and rural sectors in GDP, and what next?, we spoke about the GVA of the agriculture sector. In this article, we’ll see what is GVA and its significance.
Introduction to GVA
We know that the selling price of a good/service minus its cost price is the profit earned by the producer. In other words, the selling price of a good should be greater than the cost price. Only then can the producer cover the expenses incurred in producing the good/service and also earn a profit.
That said, there can be instances when technology can make the production of a product/service cheaper. Coupled with this, if the demand for the product is high, consumers wouldn’t mind paying a slightly higher price to purchase it. This way, the value of the good/service has suddenly increased. Gross Value Added (GVA) is such a rise in the value of goods/services produced/rendered across the nation.
What is Gross Value Added?
Short for GVA, gross value added is the value of output minus the value of intermediate consumption of a unit. Value added refers to the contribution of labour and capital in the process of production. The sum of value added for all resident units is the gross domestic product (GDP). In other words, the sum of the GVA of all sectors of an economy during a year after adjusting for taxes and subsidies is the Gross Domestic Product (GDP).
To put it simply, GVA is the additional value added to the raw material during the production process. For instance, when wood is transformed into kitchen furniture, value added will include all the expenses incurred in converting the raw material into finished goods.
Importance of Gross Value Added
Gross Value Added is the value of goods and services produced in a sector or industry of an economy. Higher gross value added is associated with a nation’s higher level of economic well-being.
However, in practice, the level of the economic well-being of a country can be calculated by dividing the GDP by the number of residents. Ergo, if two countries have the same GDP, they are not equal in terms of economic well-being. The country with a lower population is well-off than the country with a higher population.
A sector-wise breakdown of GVA helps the government to identify the sectors that need stimulus or incentives to perform better. In contrast, GDP is a better application in conducting a cross-country analysis. GDP considers people’s tax payments, which may or may not contribute to the economy. For instance, GDP can also grow for reasons other than increased production.
One such example is when there is an increase in the rate of tax, which results in higher tax collection. GVA, on the other hand, doesn’t consider tax payments. It purely accounts for the value added in the creation of goods/services in an economy. Naturally, a higher GVA suggests that the country has created more value in true sense.
How is Gross Value Added calculated?
Gross Value Added = Gross Domestic Product + taxes on products -subsidies on products
GVA at basic prices = GVA at factor cost + taxes on products – subsidies on product
· Basic price means the amount receivable for one unit of a good or service (output) by the producer from its purchaser less tax payable plus subsidy receivable
· Factor cost means the total cost of all factors of production used in producing a product or service
GDP at market prices = GVA at basic prices + taxes on products – subsidies on product
Market price is the price at which a good or service is sold in the market. It includes the cost incurred in producing the product or service, taxes paid, and subsidies received
GDP vs GVA
GVA deducts the government’s indirect taxes and adds subsidies to the GDP. It means GVA considers the money spent on the economy whereas, GDP measures the number of goods and services produced in the country.