The value added of a firm is calculated as ________.

The correct answer is value of production of the firm – value of intermediate goods used by the firm.

Key Points

• Value Added
  • Value-added describes the value that a company adds to a raw material or intermediate good during the production process.
  • The difference between the value of output and the value of intermediate products is used to calculate the national income using the value-added method.

                      Value Added = Value of Output – Intermediate

• Value Added Method
  • In a circular flow, national income is calculated using the value-added method at various phases of the production process. In the production process, it indicates the value added for each unit produced.
  • Every business adds value to the goods it purchases as an intermediary good from other firms.
  • The value of national income is the sum total of value added by all organisations.
  • The following steps are used to calculate national income using the value-added method:
    • Step 1
    • The first step is to identify and classify all value of producing enterprises in  primary, secondary, and tertiary sectors.
    • Step 2
    • Next, the Gross Domestic Product at Market Prices (GDPMP) is calculated.
    • Determine the Gross Value Added at Market Price (GVAMP) of each sector for the purpose of calculating the GDPMP; i.e. ∑GVAMP = GDPMP
    • Step 3
    • Next, determine domestic income (NDPFC).
    • Value of depreciation and net indirect tax are deducted from the gross domestic product at market price (GDPMP) to calculate domestic income; NDPFC  = GDPMP – Depreciation – Net Indirect Taxes
    • Step 4
    • To determine national income (NNPFC), the final step is to calculate Net Factor Income from Abroad (NFIA).
    • The NFIA is added along with the country's domestic income; National Income or NNPFC = Domestic Income or NDPFC + NFIA