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Gross value added: the essence of the indicator – we understand correctly!

Gross value added: the essence of the indicator – we understand correctly!

Over the past 10 years, gross value added has been included in the list of the main indicators of economic development of all economic entities of the country, brought by public administration bodies.

Is this indicator really so important, especially for those organizations whose main purpose of activity is profit?

Value added is by no means identified with the concept profit !

Gross value added (GVA) is determined by the difference between the money received from the goods sold (for which VAT is paid) and the money paid for materials (including energy resources) and services (for which VAT) used in the production of the first.

The main essence and significance of gross value added is that it is the taxable base for calculating the so-called value added tax, which provides the revenue part of the state budget, and it is also the main indicator of the country's GDP (its welfare). Therefore, the state administration always strives to increase this indicator.

But for the economies of separately functioning enterprises, this indicator does not matter much.


The calculated VDS can be derived in two ways.

  • 1st, through
    The revenue part, which is subject to VAT
    the revenue received by the enterprise/organization
    The expenditure part, which is also subject to VAT (at the entrance - when buying) materials, raw materials, energy resources, services purchased by the enterprise/organization

    GVA = Net revenue (subject to VAT) – Materials/services (for which VAT is paid)

    For example, VDS = 80 rub. = 100 rub. – 20 rub.

  • 2nd, through
    accrued VAT on income and VAT paid for purchased materials/services, i.e. VAT offset to the budget

    VDS = (VAT accrued – VAT paid) / VAT rate

    For example, GVA = 80 rubles = (20 rubles (100*20%) – 4 rubles (20*20%))/20% = 16 rubles/20% = 80 rubles.

    That is, the value added is determined by the amount of VAT paid to the budget.

But there may be a situation when the revenue part subject to VAT is less than the expenditure part, which is also subject to VAT or (according to the 2nd calculation method) The VAT paid exceeds the VAT accrued. In this case, the GVA will generally have a negative value. And what will it mean: the company has deviated from its main goal - profit?

Of course not.

In order to be objective in assessing the gross value added received in this case, it is necessary to take into account its values that are received by other counterparties interacting with this enterprise in monetary and settlement relations.

gross value added on a simple explanation

For example.

The company sells 100 million rubles.$ of products, of which 50 mnl.$ is subject to VAT at the rate of 20%. At the same time, in order to produce these $ 100 million, it purchases raw materials for $ 60 million, which is fully subject to VAT at a rate of 20%. Thus, it turns out that the added value of this organization is (-) $ 10 million (50 - 60).

At the same time, the organization that delivered $60 million worth of raw materials to the first one charged 20% VAT on this entire volume, despite the fact that it purchased only $ 5 million worth of materials for its production (for which it paid VAT).

As a result, the supplier's GVA amounted to $ 55 million. (60 - 5), and the first enterprise (-) $ 10 million. The total gross value added from the work of two business entities amounted to $ 45 million. At the same time, let's say the first organization worked in + (profit), and the second in - (loss).

Well, what does VDS have to do with it, as a criterion of economic efficiency on the way to achieving the ultimate goal - the profit of the organization.

All this leads to the fact that gross value added, as an estimated indicator, can be relevant only at the global level of all economic processes of the state, and not separately functioning business units.

how is gross value added formed at the national level

For a commercial organization, it is margin profit that is important (with which many people try to interpret it as GVA), as the main indicator of profitability and correct management decision-making.

Building up exactly margin profit contributes to an increase in overall profitability an organization under the mandatory condition of maintaining or slightly increasing its overhead costs (including labor remuneration).

What 's all this about !

The main criterion for the effectiveness of a commercial organization is still profit and money. The imposition of GVA on it, as a key indicator, by higher-level management bodies, may lead to the fact that putting it in the priority of profit and if it is misunderstood, the creation of real added value will be carried out in debt.

To effectively achieve the commercial goals of a business, flexibility in making the right management decisions is important, and not stupid interpretation and imposition of what some themselves do not understand.

Therefore, for the assessment and management of the economy of an organization / enterprise, it is not so much the added value that is important, as, for example, the marginal profit and the break-even point of its activities. The growth of these key indicators is spontaneous and will contribute to the growth of GVA at the national level.

Gross value added: we understand the essence of the indicator correctly! - Something like that!

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