6.1. Gross Value Added

Gross value added (GVA) is defined as the value of output less the value of intermediate consumption. Value added represents the contribution of labour and capital to the production process. The GVA at basic prices will include production taxes and exclude production subsidies available on the commodity.

On the other hand, GVA at factor cost includes no taxes and excludes no subsidies and GDP at market prices include both production and product taxes and excludes both production and product subsidies. When the value of taxes on products (less subsidies on products) is added, the sum of value added for all resident units gives the value of gross domestic product (GDP).

The above concept is summarized in the following equations:

GVA at basic prices = CE + OS/MI + CFC + production taxes less production subsidies GVA at factor cost = GVA at basic prices - production taxes less production subsidies GDP = ∑ GVA at basic prices + product taxes - product subsidies

The terms used in above equations are discussed below.

♤ CE: compensation of employees. It refers to the total gross (pre-tax) wages paid by employers to employees for work done

♤ OS: operating surplus. It represents the excess amount of money generated by enterprise after paying labour input costs. It is the capital available to repay their creditors, to pay taxes and eventually to finance all or part of their investment.

♤ MI: mixed income. This is similar to the concept of operating surplus but applied to unincorporated enterprises such as small family businesses like farms and retail shops or self-employed taxi drivers

♤ CFC: consumption of fixed capital. It represents the amount of fixed assets used up, during the period under consideration. This concept is different from depreciation as unlike depreciation, it is not measured at ‘historic cost’ (original price), but at current market value.

♤ Production taxes or subsidies: These are paid or received with relation to production and are independent of the volume of actual production. Some examples of production taxes are land revenues, stamps and tax on profession. Some production subsidies are subsidies to Railways, input subsidies to farmers.

♤ Product taxes or subsidies: They are paid or received on per unit of product. Some examples of product taxes are excise tax, sales tax, service tax and import and export duties. Product subsidies include food, petroleum and fertilizer subsidies.