Understanding Value Added (VA)

INTRODUCTION

Every Industry needs to purchase goods and services (Commodities) from other Industries (and even from itself!) to operate their business. These are known as Intermediate Inputs. The Industry takes these Intermediate Inputs to create a product of greater value (Output). The cost of doing business above and beyond the cost of Intermediate Inputs is known as Value Added (VA). It includes the cost of labor and taxes with hopefully some remainder for profit. Value Added can be thought of as the increase in value that the producer adds to the Intermediate Inputs as a result of the production process. 

Value Added is an incredibly important economic metric because in the IMPLAN SAM, Value Added is equal to Gross Domestic Product (GDP). In a region, total Value Added, or GDP, is the wealth created by Industry activity. Industry Value Added, therefore, is a measure of an Industry’s contribution to Gross Domestic Product (GDP). 

IMPLAN estimates regional Value Added and Value Added by Industry (as well as each of the components of VA) for every zip code, county, and state in the U.S. Importantly, IMPLAN estimates Value Added in a way such that zip codes must add up to counties, counties must add up to state, and states must add up to national values. This ensures that a region’s or an Industry’s Value Added cannot be larger than the value at a higher geography. 

This article describes Value Added within the context of the production function, briefly discusses data sources, and highlights considerations for reporting Value Added in Economic Impact Analysis

A COMPONENT OF THE INDUSTRY PRODUCTION FUNCTION

Value Added is a component of the production function of an Industry. It is the difference between an Industry’s Total Output and the costs of its Intermediate Inputs. VA has four components: Employee Compensation (EC), Proprietor Income (PI), Other Property Income (OPI), and Taxes on Production and Imports net of subsidies (TOPI). Combined, EC and PI are known as Labor Income.

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HOW IS IT CALCULATED?

There are multiple ways to calculate Value Added. VA is made up of several components which may form other composite metrics in their own right when grouped or combined in specific ways. So, calculating VA requires exploiting the relationships between any components of it which are explicitly known and any which are not since each component represents a different "piece of the same numerical whole."

Value Added is

Value Added Output Equation.png

and

Value Added Equation.png

MEASURING VALUE ADDED

IMPLAN uses several data sources to estimate regional Value Added and Value Added by Industry (as well as each of the components of VA). IMPLAN estimates Value Added in a way such that zip codes must add up to counties, counties must add up to state, and states must add up to national values. The governing controls for all IMPLAN industry-level and sub-national Value Added data come from the Bureau of Economic Analysis’ (BEA) National Income and Product Accounts (NIPA) tables. Read more about the data sources and process in Value Added by Industry Data.

VALUE ADDED IN ECONOMIC IMPACT ANALYSIS

Value Added (VA) communicates a lot of information in just one number. This is because it is a combination of EC, PI, OPI, and TOPI. Establishing a thorough understanding of what VA truly represents and exactly how it is calculated is one of the most effective steps that you can take in preparing to defend your study's findings against possible critique. Plus, a comprehensive grasp of VA, its components, and the relationships between them as contributors to Output enables users to interpret resulting VA figures with more accuracy. 

As with any economic indicator, VA figures exist at many different levels of granularity. Because it represents the difference between Output and the cost of Intermediate Inputs, a Value Added may represent a single Industry or a regional economy’s GDP. The two main locations where VA figures can be found in IMPLAN are on the Regions screen and on the Results screen.

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Value Added by Industry Data

 

Updated July 29, 2024