Value Added and GDP: The Smart Versus the Donkey
If manufacturing matters—and if industrial policy can help develop manufacturing—that is because it creates high value added. Value added is a very popular concept in daily political and economic discussion. One hears it in the television debates and read
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Value Added and GDP: The Smart Versus the Donkey
If manufacturing matters, that is because it involves relatively higher value added compared to other economic activities. Value added is a very popular concept in daily political and economic talk. One hears it in the television debates and reads it in the newspaper articles. Everybody wants the level of value added in a product or country to go up. It is also a key concept inherent in the discussion in this entire book. However, only a few are aware of what value added means technically and how it relates to manufacturing and GDP. This chapter discusses that and also relates the concept to industrial policy as a preparation for the next part of the book.
7.1 Value Added, GDP, Factor Accumulation, and Productivity Technically, value added is a precise concept, although statistically it has its usual difficulties of estimation. It is important because the total value added generated by all actors that produce economic value in a country is equal to the GDP. The latter is defined as a statistical measure of the total amount of goods and services produced within the territory of a country. GDP is also equal to the total amount of income generated in a country. Per capita GDP or per capita income is widely used to compare the
© The Author(s) 2018 M. A. Yülek, How Nations Succeed, https://doi.org/10.1007/978-981-13-0568-9_7
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developmental levels of countries; countries are divided into categories of low, middle, or high per capita income. Countries with higher per capita incomes are considered more developed than others.1 While quite imperfect in many respects, GDP and per capita GDP is considered the most widely accepted yardstick targeting design and assessment of policies. The quarterly or annual GDP (real) growth rates are considered a key performance indicator of economic policy across the globe. For example, if a country records negative growth rates for three quarters consecutively, it is technically defined to be in a recession. If a country at the middle-income level records slow growth during an extended period of time, it is said to be in the middle-income trap. In both cases, short- or long-term policies are sought to restore GDP growth. As GDP is the sum of value added in the country, any policy that is related to it actually involves value added. Value added is simply the difference between the total sales of the firm (or the sector) and all the external costs paid to inputs. So, it is the value that the firm (sector) adds on the value of the inputs it receives (Fig. 7.1). Note that both are accounting values at market prices, not economic values (which would involve the so- called opportunity costs). Value added calculated thus is equivalent to the sum of the firms’ payments to its workers and to the capitalists (such as rents paid to office, factory, warehouse, or machinery; interest paid on borrowings; and after- tax profits).2 This is quite intuitive; when the payments to external suppliers are deducted from the sales re
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