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In economics, the difference between cost of materials and labor to produce a product, and the sale price of a product is the value added. In national accounts used 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 national value added is shared between capital and labor (as the factors of production), and this sharing gives rise to issues of distribution.

Contents

National accounts

The factors of production provide "services" which raise the unit price of a product (X) relative to the cost per unit of intermediate goods used up in the production of X.

In national accounts such as the United Nations System of National Accounts (UNSNA) or the National Income and Product Accounts (NIPA), gross value added is obtained by deducting intermediate consumption from gross output. Thus gross value added is equal to net output. Net value added is obtained by deducting consumption of fixed capital (or depreciation charges) from gross value added. Net value added therefore equals gross wages, pre-tax profits net of depreciation, and indirect taxes less subsidies.

Marxist interpretation

Karl Marx's concept of the value product is similar to the national accounting concept of net national product, or net value added. It is equal to the sum of labor-compensation (variable capital) and surplus-value (pre-tax profit income). The argument is that the labour force produces a new value equivalent to its own wage-cost, plus a surplus-value.

Neoclassical economics regards the incomes constituting added value as the reward for services rendered. In his critique of political economy Marx saw them as results of production under conditions of capitalist exploitation.

Differences between Marxist and neo-classical accounting of value added

A difference between Marxist theory and conventional national accounts concerns the interpretation of the distinction between new value created, transfers of value and conserved value, and of the definition of "production".

For example, Marxist theory regards the "imputed rental value of owner-occupied housing" which is included in GDP as a fictitious entry; if the housing is owner-occupied, this housing cannot also yield real income from its market-based rental value at the same time.

In the 1993 manual of the United Nations System of National Accounts (UNSNA), the concept of "imputed rental value of owner occupied housing" is explained as follows:

"6.89. Heads of household who own the dwellings which the households occupy are formally treated as owners of unincorporated enterprises that produce housing services consumed by those same households. As well-organized markets for rented housing exist in most countries, the output of own-account housing services can be valued using the prices of the same kinds of services sold on the market in line with the general valuation rules adopted for goods or services produced on own account. In other words, the output of the housing services produced by owner-occupiers is valued at the estimated rental that a tenant would pay for the same accommodation, taking into account factors such as location, neighbourhood amenities, etc. as well as the size and quality of the dwelling itself. The same figure is recorded under household final consumption expenditures."

Marxist economists object to this accounting procedure on the ground that the monetary imputation made refers to a flow of income which does not exist, because most home owners do not rent out their homes if they are living in them.

Value added tax

Value added tax (VAT) is a sales tax on value added. It works by being charged on the sale price of goods and services whether purchased by intermediate or final consumers; however intermediate parties can reclaim VAT paid on their inputs, thus ensuring that the net VAT they pay is in effect based on the value added at that particular stage of the process.

See also

References

  • Edgar Z. Palmer, The meaning and measurement of the national income, and of other social accounting aggregates.
  • Paul A. Samuelson and William D. Nordhaus (2004) Economics. "Glossary of Terms," Value added.
  • Anwar Shaikh & Ahmet Ertugrul Tonak, Measuring the Wealth of Nations. CUP.
  • M. Yanovsky, Anatomy of Social Accounting Systems.

External links

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