Value added refers to the additional value created at a particular stage of production. In modern neoclassical economics, especially in macroeconomics, it refers to the contribution of the factors of production, i.e., land, labor, and capital goods, to raising the value of a product and corresponds to the incomes received by the owners of these factors. The factors of production provide "services" which raise the unit price of a product (X) relative to the cost per unit of raw materials and intermediate goods used up in the production of X. Economists use the value-added method as a way to avoid double-counting , i.e., the counting of the same input twice. The sum of the value added in each of the different stages of production equals the value of the final product , the product that drops out of the production process and is thus not incorporated in some new product. Final products include consumer goods and fixed capital equipment. A numerical example further explains this concept below.

Example

To understand the concept of value added, take the example of three simple stages of production:

1. 1000 Yen of miso soup is produced by a chef using pots, pans, and a stove, converting 500 Yen tofu and other ingredients. The chef and his or her tools are the "factors of production," while the tofu (and the other ingredients, ignored here) are the intermediate goods used up and converted into part of the soup.
2. The tofu used was converted using 200 Yen of soy beans. The soy beans are the raw material used up and converted into the tofu.
3. The soy beans were grown and harvested during the year. Assume, for simplicity, that the 200 Yen measures the value added in that sector. These beans are thus assumed to be simply results of the services of the factors of production.

If we simply add up the results of the three stages, we get a total of 1700 Yen. But this counts the tofu twice, first by itself and then as part of the miso soup. The soy beans are counted three times, in all three stages. This is double counting.

On the other hand, we can get an accurate estimate of the final product by using the value-added method:

1. The value added in the first process is 1000 Yen (the soup) minus 500 Yen (the tofu), equalling 500 Yen.
2. the value-added in the second process is 500 Yen (the tofu) minus 200 Yen (the soy beans), equalling 300 Yen.
3. the value added in the third process is, by assumption, 200 Yen.

The sum of these three is 1000 Yen, which is the same as the value of the final product, the miso soup.

Karl Marx

Karl Marx's concept of value added was technically similar to the current view but differed on some major questions of political economy. Whereas for neoclassicals, the word "value" in this context means the same as "price", for Marx values and prices differed on the microeconomic level, with the former corresponding to socially-necessary abstract labor time. Thus, value added corresponded to the total new labor done to produce commodities, i.e., the total new labor theory of value created. This added up to variable capital paid for labor-power plus surplus-value, i.e., labor income plus property income. It of course excluded constant capital. The difference between Marx and the neoclassicals on this issue is that while the latter see surplus-value as a reward for services rendered, Marx saw it as a result of capitalist exploitation.

See also

• Gross value added