What is Gross Value Added? Definition and Importance of GVA

The gross added value, or GVA, is known as a macro-magnitude in terms of terms within the economy. A macro-magnitude is a quantified measure of facts and data of the economy within a certain region or country.

Study crucial aspects within the economy such as unemployment or the rate of growth, in this sense as we mentioned the gross added value is a magnitude in which the value-added by producers within a region or economic area is measured.

Definition of Gross Value Added

From the accounting point of view, it is defined as the difference between the number of sales and purchases. This means to put it more simply is the difference between market prices and the cost of production.

In the business sector, the gross value is the difference between income and variable fixed capital together with what the raw material costs for production in said company, this serves to get an idea of ​​where the well-known value-added tax comes from.

With respect to the economy, this is the additional value acquired by the different goods when they are transformed through the production process. To explain it in a simple way this would be the value that is added to the raw material after being produced, as to the wood after it has been converted into kitchen furniture.

Gross value added and services

In order to know the gross added value in a service or transport company, the value of the raw material, fuel expenses, or the services provided by third parties to the revenues must be subtracted. This is the same as saying that all expenses are subtracted from earnings, not including salaries.

Importance of Gross Value Added

This is a broad concept that applies to different areas that relate to economics and finance, both public and private. Regardless if you are an ordinary person or a prominent entrepreneur, it is important to know this concept since this is the value or wealth created in the country, which is also determined as gross domestic value.

VAB = CONSUMPTION + INVESTMENT + EXPENDITURE OF THE GOVERNMENT + COMMERCIAL BALANCE

1. Consumption

Also called final goods, they are the finished article that the masses acquire after the production processes, as we mentioned in the case of the wood that would be the raw material and the kitchen furniture the final product, which will be acquired by a buyer in the consumption process, this also applies to services.

2. The investment

It is worth mentioning that at this point it does not refer to the investments with respect to buying shares, in the gross value it refers to the final investments which can be machinery or vehicles, but also the furniture and real estate could enter this investment.

3. Government expenditure

This includes the money that the government uses in the payment of the payroll of the employees that work in the different entities or institutions of the same. What is not included in this type of expenditure are subsidies or those transfers that are directed to social insurance, which are included only when said beneficiaries spend the money on products and services.

4. Balance of trade

To put it simply, the trade balance is the difference between imports and exports. Remember that imports are goods and services that the country, companies and people acquire from other countries and exports are the opposite process, are the things that other countries and companies consume but that are produced by your country or by your company.

What is the use of VAB?

This measure is a very effective way used by economists to determine the real growth or development of the country’s economy. Although it is very important to calculate the wealth that a country has produced during the period of a year, it is not useful to calculate the total wealth since there are certain elements that are outside of this calculation.

Characteristics of the VAB

The Gross Added Value is considered positive in a country when it is in constant growth, while it is considered negative in the opposite case.

High gross value added could provide the nation with a higher level of well-being. However, to know the true level of economic well-being it is necessary to calculate the per capita gross domestic product, two countries can produce or have the same amount of gross domestic product, but if you must divide it among more people, it is poorer than a country that divides that amount among fewer inhabitants.

As we see, the added value is of great importance for the economy both on a small scale and at the scale of entire countries and regions.