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 thus adjusts gross domestic product (GDP) by the impact of subsidies and taxes (tariffs) on products. it is used in the calculation of GDP, a key indicator of the state of a nation's total economy. It can also be used to see how much value is added (or lost) from a particular region, state, or province. It adds back subsidies that governments grant to certain sectors of the economy and subtracts taxes imposed on others. As per the national accounts, GVA is the output minus intermediate consumption. It is a balancing item of the national accounts' production account. It is the difference between gross output and net output.
GVA at Basic Prices = GVA at factor cost i.e. GDP + (Production Taxes - Production Subsidies)
For example, let us assume the following :-
Private consumption = $500 billion
Gross investment = $250 billion
Government investment = $150 billion
Government spending = $250 billion
Total exports = $150 billion
Total imports = $125 billion
Total taxes on products = 10%
Total subsidies on products = 5%
Using the above data, the GVA can be calculated. The first step is to calculate the GDP. GDP is computed as below:
GDP = Private consumption + gross investment + government investment + government spending + (exports - imports)
GDP = $500 billion + $250 billion + $150 billion + $250 billion + ($150 billion - $125 billion)
= $1.175 trillion (or $1,175 billion)
Next, we calculate the subsidies and taxes on products. For simplicity's sake, assume that all private consumption is consumption of products. In that case, subsidies and taxes are as follows:
Subsidies on products = $500 billion x 5% = $25 billion
Taxes on products = $500 billion x 10% = $50 billion
With this, the GVA can be calculated as follows:
GVA = GDP + Subsidies - Taxes
= $1,175 billion + $25 billion - $50 billion
= $1.15 trillion (or $1,150 billion)
GDP at Market Prices = GVA at Basic Prices + Product Taxes – Product Subsidies
= $1,150 billion + $50 billion - $25 billion
= $1,175 billion
Why do policymakers give weight to GVA?
A sector-wise breakdown provided by the GVA measure can help the policymakers to decide which sectors need incentives or stimulus or vice versa. Some people consider GVA as a better gauge of the economy because of the sharp increase in the output, due to the higher tax collections.
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