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GrossValueAdded(GVA)atbasicpricesandGVAatFactorCostsArthapedia

GrossValueAdded(GVA)atbasicpricesandGVAat
FactorCosts
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GrossValueAdded(GVA)Vs.GDP
Grossvalueadded(GVA)isdefinedasthevalueofoutputlessthevalueofintermediateconsumption.Valueadded
representsthecontributionoflabourandcapitaltotheproductionprocess.Whenthevalueoftaxesonproducts
(lesssubsidiesonproducts)isadded,thesumofvalueaddedforallresidentunitsgivesthevalueofgrossdomestic
product(GDP).Thus,GrossDomesticProduct(GDP)ofanynationrepresentsthesumtotalofgrossvalueadded
(GVA)(i.e,withoutdiscountingforcapitalconsumptionordepreciation)inallthesectorsofthateconomyduring
thesaidyearafteradjustingfortaxesandsubsidies.
IntroductionofGVAatbasicpricesinIndia
InIndia,GDPisestimatedbyCentralStatisticalOffice(http://mospi.nic.in/Mospi_New/site/inner.aspx?
status=2&menu_id=92)(CSO).UndertheFiscalResponsibilityandBudgetManagementAct2003andRules
thereunder(http://finmin.nic.in/the_ministry/dept_eco_affairs/budget/FRBM%20Statements.asp),Ministryof
FinanceusestheGDPnumbers(atcurrentprices)topegthefiscaltargets.Forthispurpose,MinistryofFinance
makestheirownprojectionsaboutGDPforthecomingtwoyearswhilespecifyingfuturefiscaltargets.
IntherevisionofNationalAccountsstatisticsdonebyCentralStatisticalOrganization(CSO)inJanuary2015
(http://pib.nic.in/archieve/others/2015/jan/d2015013005.pdf),itwasdecidedthatsectorwisewiseestimatesof
GrossValueAdded(GVA)willnowbegivenatbasicpricesinsteadoffactorcost.Insimpleterms,forany
commoditythebasicpriceistheamountreceivablebytheproducerfromthepurchaserforaunitofaproduct
minusanytaxontheproductplusanysubsidyontheproduct.However,GVAatbasicpriceswillinclude
productiontaxesandexcludeproductionsubsidiesavailableonthecommodity.Ontheotherhand,GVAatfactor
costincludesnotaxesandexcludesnosubsidiesandGDPatmarketpricesincludebothproductionandproduct
taxesandexcludesbothproductionandproductsubsidies.
TherelationshipbetweenGVAatFactorCostandGVAatBasicPricesandGDPatmarketpricesandGVAat
basicpricesisshownbelow:
GVAatfactorcost+(ProductiontaxeslessProductionsubsidies)=GVAatbasicprices
GDPatmarketprices=GVAatbasicprices+ProducttaxesProductsubsidies

Productiontaxesorproductionsubsidiesarepaidorreceivedwithrelationtoproductionandareindependentof
thevolumeofactualproduction.Someexamplesofproductiontaxesarelandrevenues,stampsandregistration
feesandtaxonprofession.SomeproductionsubsidiesincludesubsidiestoRailways,inputsubsidiestofarmers,
subsidiestovillageandsmallindustries,administrativesubsidiestocorporationsorcooperatives,etc.Product
taxesorsubsidiesarepaidorreceivedonperunitofproduct.Someexamplesofproducttaxesareexcisetax,sales
tax,servicetaxandimportandexportduties.Productsubsidiesincludefood,petroleumandfertilizersubsidies,
interestsubsidiesgiventofarmers,households,etc.throughbanks.

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TheconceptofGVAatbasicpricesfollowsfromtheUnitedNation'sSystemofNationalAccounts
(http://unstats.un.org/unsd/nationalaccount/sna.asp)(SNA)introducedin1993andcarriedforwardinanidentical
fashioninSNA2008(http://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf)asapartofrevisionof
compilationandclassificationsystems.ThishasbeenadoptedbyCSOinitsbaserevisioncarriedoutinJanuary
2015.
GVAatBasicPriceVsProducers'PriceVsFactorCostsasinTheUNSystemofNationalAccounts(2008)
IntheSNA,intermediateinputsarevaluedandrecordedatthetimetheyentertheproductionprocess,while
outputsarerecordedandvaluedastheyemergefromtheprocess.(Thedifferencebetweenthevalueofthe
intermediateinputsandthevalueoftheoutputsisgrossvalueadded.)
Morethanonesetofpricesmaybeusedtovalueoutputsandinputsdependinguponhowtaxesandsubsidieson
products,andalsotransportcharges,arerecorded.Moreover,valueaddedtaxes(VAT),andsimilardeductible
taxesmayalsoberecordedinmorethanoneway.Intermediateinputsarenormallyvaluedatpurchasersprices
andoutputsatbasicprices,oralternativelyatproducerspricesifbasicpricesarenotavailable.
ThustheSNAutilizestwokindsofpricestomeasureoutput,namely,basicpricesandproducersprices:
Thebasicpriceistheamountreceivablebytheproducerfromthepurchaserforaunitofagoodorservice
producedasoutputminusanytaxpayable,andplusanysubsidyreceivable,bytheproducerasa
consequenceofitsproductionorsale.Itexcludesanytransportchargesinvoicedseparatelybytheproducer.
Theproducerspriceistheamountreceivablebytheproducerfromthepurchaserforaunitofagoodor
serviceproducedasoutputminusanyVAT,orsimilardeductibletax,invoicedtothepurchaser.Itexcludes
anytransportchargesinvoicedseparatelybytheproducer.
Basicpricesexcludeanytaxesonproductstheproducerreceivesfromthepurchaserandpassesontogovernment
butincludeanysubsidiestheproducerreceivesfromgovernmentandusestolowerthepriceschargedto
purchasers.Bothproducersandbasicpricesareactualtransactionpricesthatcanbedirectlyobservedand
recorded.Thebasicpricemeasurestheamountretainedbytheproducerandis,therefore,thepricemostrelevant
fortheproducersdecisiontaking.Thebasicpriceisobtainedfromtheproducerspricebydeductinganytaxon
productspayableonaunitofoutput(otherthaninvoicedVATalreadyomittedfromtheproducersprice)and
addinganysubsidyonproductsreceivableonaunitofoutput.Inconsequence,notaxesonproductsorsubsidies
onproductsaretoberecordedaspayablesorreceivablesintheproducersgenerationofincomeaccountwhen
valueaddedismeasuredatbasicprices,thepreferredvaluationbasisintheSNA.
Grossvalueaddedatbasicpricesisdefinedasoutputvaluedatbasicpriceslessintermediateconsumption
valuedatpurchasersprices.HeretheGVAisknownbythepricewithwhichtheoutputisvalued.Fromthepoint
ofviewoftheproducer,purchaserspricesforinputsandbasicpricesforoutputsrepresentthepricesactuallypaid
andreceived.Theiruseleadstoameasureofgrossvalueaddedthatisparticularlyrelevantfortheproducer.
Grossvalueaddedatproducerspricesisdefinedasoutputvaluedatproducerspriceslessintermediate
consumptionvaluedatpurchasersprices.IntheabsenceofVAT,thetotalvalueoftheintermediateinputs
consumedisthesamewhethertheyarevaluedatproducersoratpurchasersprices,inwhichcasethismeasureof
grossvalueaddedisthesameasonethatusesproducerspricestovaluebothinputsandoutputs.Itisan
economicallymeaningfulmeasurethatisequivalenttothetraditionalmeasureofgrossvalueaddedatmarket
prices.However,inthepresenceofVAT,theproducerspriceexcludesinvoicedVAT,anditwouldbe
inappropriatetodescribethismeasureasbeingatmarketprices.
Bydefinition,thevalueofoutputatproducerspricesexceedsthatatbasicpricesbytheamount,ifany,ofthe
taxesonproducts,lesssubsidiesonproductssothatthetwoassociatedmeasuresofgrossvalueaddedmustdiffer
bythesameamount.

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GrossvalueaddedatfactorcostisnotaconceptusedexplicitlyintheSNA.However,itcaneasilybederived
fromeitherofGVAatbasicpricesorGVAatproducer'spricebysubtractingthevalueofanytaxesonproduction
andaddingsubsidiesonproduction,payableoutofgrossvalueaddedasdefined.Forexample,theonlytaxeson
productionremainingtobepaidoutofgrossvalueaddedatbasicpricesconsistofothertaxesonproduction
whicharenotchargedperunit.Theseconsistmostlyofcurrenttaxes(orsubsidies)onthelabourorcapital
employedintheenterprise,suchaspayrolltaxesorcurrenttaxesonvehiclesorbuildings.Grossvalueaddedat
factorcostcanthusbederivedfromgrossvalueaddedatbasicpricesbysubtractingothertaxesonproductionand
addingsubsidiesonproduction.
Theconceptualdifficultywithgrossvalueaddedatfactorcostisthatthereisnoobservablesetofpricessuchthat
grossvalueaddedatfactorcostisobtaineddirectlybymultiplyingthissetofpricesbythesetsofquantitiesof
outputs.Bydefinition,othertaxesorsubsidiesonproductionarenottaxesorsubsidiesonproductsthatcanbe
eliminatedfromtheinputandoutputprices.Thus,despiteitstraditionalname,grossvalueaddedatfactorcostis
notstrictlyameasureofvalueaddeditisessentiallyameasureofincomeandnotoutput.Itrepresentstheamount
remainingfordistributionoutofgrossvalueadded,howeverdefined,afterthepaymentofalltaxesonproduction
andthereceiptofallsubsidiesonproduction.Itmakesnodifferencewhichmeasureofgrossvalueaddedisused
toderivethisincomemeasurebecausethealternativemeasuresofvalueaddedconsideredabovedifferonlyin
respectoftheamountsofthetaxesorsubsidiesonproductionthatremainpayableoutofgrossvalueadded.
DifferentpricescomingintoGVAestimations

=Purchasers'price(orthepriceat
whichthatproductisbeingsoldinthe
market)

()wholesalers'&retailers'margins

()separatelyinvoicedTransport
Charges

()VATnotdeductiblebythepurchaser

=Producers'Price

(+)subsidiesontheproduct

()taxesontheproductexcluding
invoicedVAT

=BasicPrice

()ProductionTaxes

(+)ProductionSubsidies

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=FactorCosts

DerivingGDPfromtheGVA
FromthesevariousconceptsofGVA,onecanarriveatanestimateofGDPinthefollowingmanner:
a.GDP=thesumofthegrossvalueaddedatproducersprices,plustaxesonimports,lesssubsidieson
imports,plusnondeductibleVAT.
b.GDP=thesumofthegrossvalueaddedatbasicprices,plusalltaxesonproducts,lessallsubsidieson
products.
c.GDP=thesumofthegrossvalueaddedatfactorcostplusalltaxesonproducts,lessallsubsidieson
products,plusallothertaxesonproduction,lessallothersubsidiesonproduction.
Incases(b)and(c),theitemstaxesonproductsandsubsidiesonproductsincludestaxesandsubsidiesonimports
aswellasonoutputs.

AlsoSee
GDP/NationalAccountsRevisedSerieswith201112asbaseyear(http://arthapedia.in/index.php?
title=GDP_/_National_Accounts_Revised_Series_with_201112_as_base_year)
Source:MinistryofStatisticsandProgrammeImplementation,Eurostat,OECDGlossaryofStatisticalterms,EPW
ResearchFoundation(February14,2015publication)UNSystemofNationalAccounts2008
(http://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf)
GrossDomesticperplexity(http://indianexpress.com/article/opinion/columns/grossdomesticproductinflation
indianeconomygrowthvariationscolumn2849408/),ArvindVirmani,IndianExpress,13June2016

Contributedby
Ms.AakankshaArora(IES2013)(http://ies.gov.in/myaccountprofileview.php?memid=479)
Emailaakanksha.arora20@gmail.com(mailto:aakanksha.arora20@gmail.com)
Retrievedfrom"http://www.arthapedia.in/index.php?
title=Gross_Value_Added_(GVA)_at_basic_prices_and_GVA_at_Factor_Costs"
Category:Concepts
Thispagewasfirstcreatedon30March2015,at07:07andlastmodifiedon13June2016,at14:46.
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