VI. THE PRODUCTION ACCOUNT
L. Gross and net value added (B.1)
1. Introduction
| 6.222. | Value added is the balancing item in the production account for an institutional unit or sector, or establishment or industry. It measures the value created by production and may be calculated either before or after deducting the consumption of fixed capital on the fixed assets used. As stated above:
(a) Gross value added is defined as the value of output less the value of intermediate consumption;
(b) Net value added is defined as the value of output less the values of both intermediate consumption and consumption of fixed capital.
To avoid repetition, only gross value added will be cited in the following sections when the corresponding conclusions for net value added are obvious. |
| 6.223. | Gross value added is an unduplicated measure of output in which the values of the goods and services used as intermediate inputs are eliminated from the value of output. The production process itself can be described by a vector of the quantities of goods and services consumed or produced in which inputs carry a negative sign. By associating a price vector with this quantity vector, gross value added is obtained as the inner product of the two vectors.
Let q = the vector of quantities consumed or produced
p = the vector of prices
Then
gross value added = pq
Alternative measures of gross value added may be obtained by combining different price vectors with a single quantity vector. For example, gross value added may be measured using the prices of some other time period or some other country. However, the price and quantity vectors are not independent of each other. The technology used - i.e., the particular production process selected - is itself influenced by the relative input and output prices confronting the producer. The quantities therefore depend on the prices. A process which is economically efficient and profitable at one set of prices may cease to be so at another and would, therefore, not be used at those prices. For this reason, figures of gross value added obtained by revaluing the quantities at very different sets of relative prices may have little economic significance and may even become negative. |
| 6.224. | From an accounting point of view, gross value added is essentially a balancing item. As such, it is not an independent entity. It is defined in the context of a production account, being a function of all the other entries in the account. There is no actual set of goods or services that can be identified with the gross value added of an individual producer, sector or industry. Gross value added is not measured as the sum of any specific set of transactions. As a balancing item it lacks dimensions in the sense that it has no quantity units of its own in which it can be measured, and hence also no prices of its own. |
2. Alternative measures of value added
| 6.225. | As indicated above, alternative measures of gross value added may be obtained by associating different price vectors with a given vector of input and output quantities. The various measures which may be derived using the different sets of prices recognized in the System are considered below. |
Gross value added at basic prices
| 6.226. | Gross value added at basic prices is defined as output valued at basic prices less intermediate consumption valued at purchasers' prices. Although the outputs and inputs are valued using different sets of prices, for brevity the value added is described by the prices used to value the outputs. From the point of view of the producer, purchasers' prices for inputs and basic prices for outputs represent the prices actually paid and received. Their use leads to a measure of gross value added which is particularly relevant for the producer. The resulting measure has also some convenient properties for aggregation purposes as explained later, although there is no named aggregate in the System which corresponds to the sum of the gross values added of all enterprises measured at basic prices. |
Gross value added at producers' prices
| 6.227. | Gross value added at producers' prices is defined as output valued at producers' prices less intermediate consumption valued at purchasers' prices. As already explained, in the absence of VAT, the total value of the intermediate inputs consumed is the same whether they are valued at producers' or at purchasers' prices, in which case this measure of gross value added is the same as one which uses producers' prices to value both inputs and outputs. It is an economically meaningful measure that is equivalent to the traditional measure of gross value added at market prices. However, in the presence of VAT, the producer's price excludes invoiced VAT, and it would be inappropriate to describe this measure as being at "market" prices. |
| 6.228. | Both this measure of gross value added and that described in the previous section use purchasers' prices to value intermediate inputs. The difference between the two measures is entirely attributable to their differing treatments of taxes or subsidies on products payable on outputs (other than invoiced VAT). By definition, the value of output at producers' prices exceeds that at basic prices by the amount, if any, of the taxes, less subsidies, on the output so that the two associated measures of gross value added must differ by the same amount. |
Gross value added at factor cost
| 6.229. | Gross value added at factor cost is not a concept used explicitly in the System. Nevertheless, it can easily be derived from either of the measures of gross value added presented above by subtracting the value of any taxes, less subsidies, on production payable out of gross value added as defined. For example, the only taxes on production remaining to be paid out of gross value added at basic prices consist of "other taxes on production". These consist mostly of current taxes (or subsidies) on the labour or capital employed in the enterprise, such as payroll taxes or current taxes on vehicles or buildings. Gross value added at factor cost can, therefore, be derived from gross value added at basic prices by subtracting "other taxes, less subsidies, on production". |
| 6.230. | The conceptual difficulty with gross value added at factor cost is that there is no observable vector of prices such that gross value added at factor cost is obtained directly by multiplying the price vector by the vector of quantities of inputs and outputs that defines the production process. By definition, "other taxes or subsidies on production" are not taxes or subsidies on products that can be eliminated from the input and output prices. Thus, despite its traditional name, gross value added at factor cost is not strictly a measure of value added. |
| 6.231. | Gross value added at factor cost is essentially a measure of income and not output. It represents the amount remaining for distribution out of gross value added, however defined, after the payment of all taxes on production and the receipt of all subsidies on production. It makes no difference which measure of gross value added is used because the measures considered above differ only in respect of the amounts of the taxes or subsidies on production which remain payable out of gross value added. |
| 6.232. | Claims on gross value added, other than payments of taxes, less subsidies, to government used to be described as "factor incomes". While the concept of factor income is no longer used in the System, gross value added at factor cost could be interpreted as measuring the value of the fund out of which so-called "factor incomes" can be paid: it follows that it is equal to the total value of the "factor" incomes generated by production. |
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