Glossary term
Value Added: Meaning and Definition
Reviewed and approved by Dr. Anamika ShrivastavaPublished Last updated
Value added is the value of a producer's output minus the value of the intermediate goods and services it bought from other producers. It measures the producer's own contribution to output. Adding value added across all producers gives GDP without counting any input twice.
In more detail
Value added avoids counting the same output twice. A baker buys flour for ₹60 and sells bread for ₹100, so the bakery adds ₹40. Summing value added at every stage of production gives the same total as the value of final goods, which is why national accountants prefer it to adding up all sales. It can be measured gross or net of depreciation.
Example
A bakery buys flour, sugar and fuel worth ₹6,000 and sells bread worth ₹10,000 in a day. Its value added is ₹10,000 − ₹6,000 = ₹4,000. That ₹4,000 is what pays the bakery's wages, rent, interest and profit.
Key points
- Value of output = sales + change in inventories.
- Gross value added minus depreciation = net value added.
- India's official statistics report GVA at basic prices by industry.
Common mistake
Adding the value of intermediate goods to the value of final goods. That counts the flour twice.
Related terms
Gross domestic productIntermediate goodsDouble counting
Where it is explained
The value added method, with a worked example, is in Class 12 Macroeconomics Chapter 2: National Income Accounting.