The value added of a firm is?

Question

Which one is the best answer....

A. the value of the firm’s products after production costs have been subtracted

B. the payments the firm has made that are not directly associated with the production process.

C. the sum of all the income—wages, profits, rents, and interest—that it generates.

I am torn between C & A??? Can someone help

Answer 1

"A" is right one for microeconomics course.

P.S. but "C" is right too in some sense - for macroeconomics (It's actually called GDP from income side). But you should choose "A".

Answer 2

the correct answer is A. according to the definition of Values added, VA is the value which adds up on the particular product at EVERY SINGLE STAGE OF PRODUCTION. for example if you are Tailor, your final good is the clothing items and the raw material you use is fabric, now you purchase this fabric which has some monetary value (say $50) , and you do some cutting, and sewing and attaching and measuring jobs, and you sell your final product (say Dress )for  $150. this 150 includes the 50 you have paid for the fabric and 100 for the development jobs you have done and the time and labor you have used to produce the final product , so if you subtract the initial cost of purchasing the fabric (100) the value that you have added to that piece of fabric is 100.

I am thinking C is incorrect because the sum of wages, rents, profit and interest is another approach which is called income approached, it has to be equal with VA approach in terms of the final outcome. but they are completely different appraoches.

Answer 3

A.

Answer 4

The correct answer is C. the sum of all the income—wages, profits, rents, and interest—that it generates.

You are correct that A could have been correct if it was expressed differently like value of prioducts minus value of direct raw materials.. But it is not correct  to subtract all production costs which include wages (labour costs) from value of production to arrive at value added. Labour  cost though a part of production cost, ia also part of value added.. So option A is not correct.

Value added is the difference between value of goods produced minus the value of (intermediate) goods consumed in producing the goods. This difference in value is what gets distributed as income among the factors of production like land (rent), capital (interest), labor (wages) and entrpreneur (profit) as return of risk and organisation.

To better understand things please read the notes and choose the correct answer:

Value added refers to the additional value created at a particular stage of production or through image and marketing. In modern neoclassical economics, especially in macroeconomics, it refers to the contribution of the factors of production, i.e., land, labor, and capital goods, to raising the value of a product and corresponds to the incomes received by the owners of these factors. The factors of production provide "services" which raise the unit price of a product (X) relative to the cost per unit of intermediate goods used up in the production of X. Value added is shared between the factors of production (capital, labor, also human capital), giving rise to issues of distribution.

Method of calculation

Economists use the value-added method as a way to avoid double counting, i.e., the counting of the same input twice. The sum of the value added in each of the different stages of production equals the value of the final product, the product that drops out of the production process and is thus not incorporated in some new product. Final products include consumer goods and fixed capital equipment. A numerical example illustrating the double counting issue further explains this concept below. In a microeconomic context, Value Added is simply measured as the value of the output produced (by a firm for example) minus the costs of the intermediate goods. The result must be equal to the sum of wages and profits. The issue of how the value added is shared between factors of production (usually considered simply as "labour" and "capital") translates to the question what part of value added goes to wages and what part to profits.

Example calculation

To understand the concept of value added, take the example of three simple stages of production:

1000 Yen of miso soup is produced by a chef using pots, pans, and a stove, converting 500 Yen tofu and other ingredients. The chef and his or her tools are the "factors of production," while the tofu (and the other ingredients, ignored here) are the intermediate goods used up and converted into part of the soup.

The tofu used was converted using 200 Yen of soy beans. The soy beans are the raw material used up and converted into the tofu.

The soy beans were grown and harvested during the year. Assume, for simplicity, that the 200 Yen measures the value added in that sector. These beans are thus assumed to be simply results of the services of the factors of production.

If we simply add up the results of the three stages, we get a total of 1900 Yen. But this counts the tofu twice, first by itself and then as part of the miso soup. The soy beans are counted three times, in all three stages. This is double (or triple) counting.

On the other hand, we can get an accurate estimate of the final product by using the value-added method:

The value added in the first process is 1000 Yen (the soup) minus 500 Yen (the tofu), equalling 500 Yen.

the value-added in the second process is 500 Yen (the tofu) minus 200 Yen (the soy beans), equalling 300 Yen.

the value added in the third process is, by assumption, 200 Yen.

The sum of these three is 1000 Yen, which is the same as the value of the final product, the miso soup.

National Accounts

In national accounts such as the United Nations System of National Accounts (UNSNA) or the NIPA's, gross value added is obtained by deducting intermediate consumption from gross output. Thus gross value added is equal to net output. Net value added is obtained by deducting consumption of fixed capital (or depreciation charges) from gross value added. Net value added therefore equals gross wages, pre-tax profits net of depreciation, and indirect taxes less subsidies.