LEARN / GLOSSARY
Value added
An industry’s gross output minus the inputs it purchased from others. The measure exists to avoid double-counting, and that design decision determines what it can and cannot tell you.
Definition
The Bureau of Economic Analysis defines an industry’s value added as its gross output, consisting of sales or receipts and other operating income, commodity taxes and inventory change, minus its intermediate inputs, consisting of energy, raw materials, semi-finished goods and services purchased from domestic industries or from foreign sources.
The three components of value added are compensation of employees, taxes on production and imports less subsidies, and gross operating surplus. Summed across all industries, value added equals gross domestic product.
Why the dictionary version is insufficient
Describing value added as an industry’s contribution to output conceals the subtraction that defines it. Because purchased inputs are removed, an industry that outsources more of its production shows lower value added while producing the same finished goods, and the measure falls without any change in physical output.
Institute analysisValue added answers an accounting question about who captured income, not an engineering question about what can be produced. For capacity assessment it is the wrong instrument, accurately calibrated.
Related terms
Reshoring · Deindustrialization · Industrial base
Appears in
When Did American Deindustrialization Begin?
What Is Reindustrialization?
Read next
When Did American Deindustrialization Begin?
Sources
- U.S. Bureau of Economic Analysis, Guide to the Interactive GDP by Industry Accounts Tables. bea.gov
- U.S. Bureau of Economic Analysis, Value Added by Industry: Manufacturing as a Percentage of GDP, series VAPGDPMA. fred.stlouisfed.org