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.
GVA 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 (GVA) is an economic productivity metric that measures the contribution of a corporate subsidiary, company, or municipality to an economy, producer, sector, or region.
- GVA is the output of the country less the intermediate consumption, which is the difference between gross output and net output.
- GVA is important because it is used to adjust GDP, which is a key indicator of the state of a nation's total economy.
- It can also be used to measure how much money a product or service has contributed toward meeting a company's fixed costs.
Understanding Gross Value Added (GVA)
GVA is the output of the country less the intermediate consumption, which is the difference between gross output and net output. GVA is important because it is used in the calculation of GDP, a key indicator of the state of a nation's total economy. It 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 over GDP or gross national product (GNP). GVA is related to GDP through taxes on products and subsidies on products. It 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 GVA by a particular product, service, or corporate unit that the company currently produces or provides. 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. In other words, the GVA number reveals the contribution made by that particular product to the company's profit.
Formula for GVA
GVA=GDP+SP−TPwhere:SP= Subsidies on productsTP= Taxes on products
Gross Value Added Example
Let's consider a hypothetical example for the fictitious country, Investopedialand. As a very simplified example of calculating GVA, 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 GVA 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 GVA can be calculated as follows:
- Gross value added = $1.175 trillion + $25 billion - $50 billion = $1.15 trillion
How Does GVA Differ From GDP?
Gross domestic product (GDP) measures the value of all of the total goods and services produced in a country.
Gross value added (GVA) is the value added to these products to enhance the various aspects of them. GVA takes the GDP and adds to the value of subsidies paid on those predicts and then subtracts out taxes paid on them.
What Is Value-Added for Companies?
The term "value-added" describes the economic value that a company grants to its products or services before offering them to customers. Value-added helps explain why companies are able to sell their goods or services for more than they cost to produce.