Value Added – Meaning, Definition & Concepts | Economics Dictionary
The added value or value added is the additional utility that has a good or service as a consequence of having undergone a transformation process.
In other words, the value of a product or service is worth more than the sum of the resources used. This transformation process from a series of elements to a final element produces added value.
For example, metal, rubber, and some electronic components alone are not worth much. However, if we shape the metal we can get the body of a car. If we shape the rubber we can make wheels. To all this, we add the right electronic components and we can get a complete car.
In other words, metal, rubber and electronic components have undergone a transformation process. Together, these elements create another element with much greater utility.
Goods or Services with Low, Medium and High Added Value
It is common among economic analysts to make references to these concepts. So, depending on the good or service we are talking about, we add a kind of label.
In this way, we can differentiate between the following goods or services:
- Low added value: These are products whose transformation process does not require much knowledge or complex production processes. For example, a loaf of bread.
- Medium added value: These are products that are halfway between those with low and high added value. For example, a t-shirt.
- High added value: These are products or services whose transformation process requires advanced knowledge and whose production process is more complex. For example, the manufacture of cabins for commercial aircraft.
These examples are purely anecdotal. Since, any product, no matter how basic, can go from being low to high added value.
For example, a fabric T-shirt may have low added value. However, If we change the material and make it breathable, it can be of medium added value. If, in addition to being breathable, it is composed of a material that allows it to dry quickly, we would be facing a product with high added value.
Definitions of Vaue Added
Being a more or less abstract concept, its definition has evolved over the years. According to the author and the field to which he refers, it has been shaping up in one way or another.
For example, the Oxford dictionary defines value added as the amount by which the value of a product increases according to the stages of production, discounting the initial costs.
Another definition worth citing for its simplicity is that of the authors Born and Banchman in one of their books on the concept: “Adding value means selling the barbecue, not the steak.”
Accounting Added Value
We can also understand the concept from an accounting point of view. In this case, it would be what remains when subtracting the amount of purchases from the sales amount. That is, the price at which we sell and the price it costs us to produce it.
As we have seen, it is a term that ranges from the simple to the abstract. Depending on what we refer to, we may find one definition more appropriate than another. For this reason, it is important, first of all, to think about what we want to refer to and what field of economics we are in.