What Is Gross Value Added (GVA)?
Let me explain gross value added (GVA) directly to you: it's an economic productivity metric that measures the contribution of a producer, industry, sector, or region to an economy.
GVA gives you a dollar value for the goods and services produced in a country, minus the cost of all inputs, raw materials, and intermediate consumption directly tied to that production. This metric adjusts gross domestic product (GDP) by factoring in the impact of subsidies and taxes on products.
Key Takeaways
- 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.
Understanding Gross Value Added (GVA)
You should know that GVA is the country's output minus its intermediate consumption—the spending required to produce goods and services—which marks the difference between gross output and net output. I emphasize its importance: GVA is used when calculating gross domestic product (GDP), a key indicator of a nation's total economy. You can also use it to see how much value is added or lost from a particular industry, region, state, or province for policy-making.
At the national level, GVA is sometimes preferred over GDP or gross national product (GNP) as a measure of total economic output and growth. It relates to GDP through taxes and subsidies on products, adding back subsidies governments grant to certain sectors and subtracting taxes imposed on others.
Business Level Gross Value Added
At the company level, I use this metric to represent the GVA by a particular product, service, or corporate unit that the company produces or provides. Once you subtract the consumption of fixed capital and depreciation effects, you know how much net value a particular operation adds to the bottom line. In other words, the GVA number shows you the contribution that particular product makes to the company's profit.
Formula for GVA
Here's the formula you need: GVA = GDP + SP - TP, where SP stands for subsidies on products and TP for taxes on products. This is how you compute it directly.
Gross Value Added Example
Consider this hypothetical example for a fictitious country, Investopedialand, to see how it works. Using data like private consumption at $500 billion, gross investment at $250 billion, government investment at $150 billion, government spending at $250 billion, total exports at $150 billion, total imports at $125 billion, taxes on products at 10%, and subsidies at 5%.
First, calculate GDP as private consumption + gross investment + government investment + government spending + (exports - imports), which gives $1.175 trillion. Then, subsidies on products are $25 billion and taxes $50 billion, so GVA is $1.175 trillion + $25 billion - $50 billion = $1.15 trillion. That's how you apply it.
What Is the Difference Between GVA and GDP?
Gross domestic product (GDP) measures the value of all goods and services produced in a country. Gross value added (GVA) is the value added to purchased goods and services used in production within an economy. GVA takes GDP and adds subsidies paid on products while subtracting taxes paid on them.
What Is the Difference Between GVA and Net Value Added?
Net value added comes from subtracting the consumption of fixed capital—the decline in value of fixed assets from aging, wear and tear, obsolescence, and other factors—from GVA.
Why Is GVA Important?
GVA is important because it allows lawmakers to allocate resources and create economic policies that might boost the output of producers, sectors, regions, or industries.
The Bottom Line
Gross value added is the amount of capital or value added to an economy by sectors, regions, producers, or industries. You calculate it by subtracting the cost of all inputs, raw materials, and taxes from all sectors and industries from gross national product and adding subsidies.
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