What Is Gross Value Added – GVA?
Gross value added (GVA) is an economic productivity metric that measures the contribution of a corporate subsidiary, company or municipality to an economy, producer, sector or region. Gross value added provides a dollar value for the amount of goods and services that have been produced in a country, minus the cost of all inputs and raw materials that are directly attributable to that production.
GVA thus adjusts gross domestic product (GDP) by the impact of subsidies and taxes (tariffs) on products.
- Gross value added is the output of the country less the intermediate consumption, which is the difference between gross output and net output.
- Gross value added is important because it is used to adjust GDP, which is a key indicator of the state of a nation's total economy.
- At the firm level, GVA can also be used to measure how much money a product or service has contributed toward meeting the company's fixed costs.
The Formula for GVA Is
GVA=GDP+SP−TPwhere:SP= Subsidies on products
What Does Gross Value Added Tell You?
Gross value added is the output of the country less than the intermediate consumption, which is the difference between gross output and net output. Gross value added is important because it is used in the calculation of gross domestic product (GDP), which is a key indicator of the state of a nation's total economy. GVA can also be used to see how much value is added (or lost) from a particular region, state or province.
At the national level, GVA is sometimes favored as a measure of total economic output and growth compared with gross domestic product (GDP) or gross national product (GNP). Gross value added is related to GDP through taxes on products and subsidies on products. GVA adds back subsidies that governments grant to certain sectors of the economy and subtracts taxes imposed on others.
At the company level, this metric is often calculated to represent the gross value added by a particular product or service or corporate unit that the company currently produces or provides. 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.
Example of Gross Value Added
Let's consider a hypothetical example for the fictitious country, Investopedialand. As a very simplified example of calculating gross value added, consider the following data for our fictitious country:
- Private consumption = $500 billion
- Gross investment = $250 billion
- Government investment = $150 billion
- Government spending = $250 billion
- Total exports = $150 billion
- Total imports = $125 billion
- Total taxes on products = 10%
- Total subsidies on products = 5%
Using this data, the gross value added can be calculated. The first step is to calculate the GDP. Recall that GDP is computed as private consumption + gross investment + government investment + government spending + (exports - imports):
- GDP = $500 billion + $250 billion + $150 billion + $250 billion + ($150 billion - $125 billion) = $1.175 trillion
Next, we calculate the subsidies and taxes on products. For simplicity's sake, assume that all private consumption is consumption of products. In that case, subsidies and taxes are as follows:
- Subsidies on products = $500 billion x 5% = $25 billion
- Taxes on products = $500 billion x 10% = $50 billion
With this, the gross value added can be calculated as follows:
- Gross value added = $1.175 trillion + $25 billion - $50 billion = $1.15 trillion