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Gross Value Added (GVA) at basic prices and GVA at Factor Costs

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Gross Value Added (GVA) Vs. GDP
Gross value added (GVA) is defined as the value of output less the value of intermediate consumption. Value added represents the contribution of labour and capital to the production process. When the value of taxes on products (less subsidies on products) is added, the sum of value added for all resident units gives the value of gross domestic product (GDP). Thus, Gross Domestic Product (GDP) of any nation represents the sum total of gross value added (GVA) (i.e, without discounting for capital consumption or depreciation) in all the sectors of that economy during the said year after adjusting for taxes and subsidies. 

Introduction of GVA at basic prices in India
In India, GDP is estimated by Central Statistical Office (CSO). Under the Fiscal Responsibility and Budget Management Act 2003 and Rules thereunder, Ministry of Finance uses the GDP numbers (at current prices) to peg the fiscal targets. For this purpose, Ministry of Finance makes their own projections about GDP for the coming two years while specifying future fiscal targets.

In the revision of National Accounts statistics done by Central Statistical Organization (CSO) in January 2015, it was decided that sector-wise wise estimates of Gross Value Added (GVA) will now be given at basic prices instead of factor cost.  In simple terms, for any commodity the basic price is the amount receivable by the producer from the purchaser for a unit of a product minus any tax on the product plus any subsidy on the product. However, GVA at basic prices will include production taxes and exclude production subsidies available on the commodity. On the other hand, GVA at factor cost includes no taxes and excludes no subsidies and GDP at market prices include both production and product taxes and excludes both production and product subsidies.

The relationship between GVA at Factor Cost and GVA at Basic Prices and GDP at market prices and GVA at basic prices is shown below:

  GVA  at factor cost + (Production taxes less Production subsidies) = GVA at basic  prices
  GDP  at market prices = GVA at basic prices + Product taxes- Product subsidies

Production taxes or production subsidies are paid or received with relation to production and are independent of the volume of actual production. Some examples of production taxes are land revenues, stamps and registration fees and tax on profession. Some production subsidies include subsidies to Railways, input subsidies to farmers, subsidies to village and small industries, administrative subsidies to corporations or cooperatives, etc.  Product taxes or subsidies are paid or received on per unit of product. Some examples of product taxes are excise tax, sales tax, service tax and import and export duties. Product subsidies include food, petroleum and fertilizer subsidies, interest subsidies given to farmers, households, etc. through banks.

The concept of GVA at basic prices follows from the United Nation's System of National Accounts (SNA) introduced in 1993 and carried forward in an identical fashion in SNA 2008 as a part of revision of compilation and classification systems. This has been adopted by CSO in its base revision carried out in January 2015.

GVA at Basic Price Vs Producers' Price Vs Factor Costs  as in The UN System of National Accounts (2008)
In the SNA, intermediate inputs are valued and recorded at the time they enter the production process, while outputs are recorded and valued as they emerge from the process. (The difference between the value of the intermediate inputs and the value of the outputs is gross value added.)

More than one set of prices may be used to value outputs and inputs depending upon how taxes and subsidies on products, and also transport charges, are recorded. Moreover, value added taxes (VAT), and similar deductible taxes may also be recorded in more than one way. Intermediate inputs are normally valued at purchasers’ prices and outputs at basic prices, or alternatively at producers’ prices if basic prices are not available.

Thus the SNA utilizes two kinds of prices to measure output, namely, basic prices and producers’ prices:

Basic prices exclude any taxes on products the producer receives from the purchaser and passes on to government but include any subsidies the producer receives from government and uses to lower the prices charged to purchasers. Both producers’ and basic prices are actual transaction prices that can be directly observed and recorded. The basic price measures the amount retained by the producer and is, therefore, the price most relevant for the producer’s decision-taking. The basic price is obtained from the producer’s price by deducting any tax on products payable on a unit of output (other than invoiced VAT already omitted from the producer’s price) and adding any subsidy on products receivable on a unit of output. In consequence, no taxes on products or subsidies on products are to be recorded as payables or receivables in the producer’s generation of income account when value added is measured at basic prices, the preferred valuation basis in the SNA.

Gross value added at basic prices is defined as output valued at basic prices less intermediate consumption valued at purchasers’ prices.  Here the GVA is known by the price with which the output is valued. From the point of view of the producer, purchasers’ prices for inputs and basic prices for outputs represent the prices actually paid and received. Their use leads to a measure of gross value added that is particularly relevant for the producer.

Gross value added at producers’ prices is defined as output valued at producers’ prices less intermediate consumption valued at purchasers’ prices. In the absence of VAT, the total value of the intermediate inputs consumed is the same whether they are valued at producers’ or at purchasers’ prices, in which case this measure of gross value added is the same as one that uses producers’ prices to value both inputs and outputs. It is an economically meaningful measure that is equivalent to the traditional measure of gross value added at market prices. However, in the presence of VAT, the producer’s price excludes invoiced VAT, and it would be inappropriate to describe this measure as being at “market” prices.

By definition, the value of output at producers’ prices exceeds that at basic prices by the amount, if any, of the taxes on products, less subsidies on products so that the two associated measures of gross value added must differ by the same amount.

Gross value added at factor cost is not a concept used explicitly in the SNA. However, it can easily be derived from either of GVA at basic prices or GVA at producer's price by subtracting the value of any taxes on production and adding subsidies on production, payable out of gross value added as defined. For example, the only taxes on production remaining to be paid out of gross value added at basic prices consist of “other taxes on production” which are not charged per unit. These consist mostly of current taxes (or subsidies) on the labour or capital employed in the enterprise, such as payroll taxes or current taxes on vehicles or buildings. Gross value added at factor cost can thus be derived from gross value added at basic prices by subtracting other taxes on production and adding subsidies on production.

The conceptual difficulty with gross value added at factor cost is that there is no observable set of prices such that gross value added at factor cost is obtained directly by multiplying this set of prices by the sets of quantities of outputs. By definition, other taxes or subsidies on production are not taxes or subsidies on products that can be eliminated from the input and output prices. Thus, despite its traditional name, gross value added at factor cost is not strictly a measure of value added; it is essentially a measure of income and not output. It represents the amount remaining for distribution out of gross value added, however defined, after the payment of all taxes on production and the receipt of all subsidies on production. It makes no difference which measure of gross value added is used to derive this income measure because the alternative measures of value added considered above differ only in respect of the amounts of the taxes or subsidies on production that remain payable out of gross value added.

Different prices coming into GVA estimations

 

= Purchasers' price (or the price at which that product is being sold in the market)

(-) wholesalers' & retailers' margins

 

(-) separately invoiced Transport Charges

 

(-) VAT not deductible by the purchaser

 

 

= Producers' Price

(+) subsidies on the product

 

(-) taxes on the product excluding invoiced VAT

 

 

= Basic Price

(-) Production Taxes

 

(+) Production Subsidies

 

 

= Factor Costs

Deriving GDP from the GVA
From these various concepts of GVA, one can arrive at an estimate of GDP in the following manner:

  1. GDP = the sum of the gross value added at producers’ prices, plus taxes on imports, less subsidies on imports, plus non-deductible VAT.
  2. GDP = the sum of the gross value added at basic prices, plus all taxes on products, less all subsidies on products.
  3. GDP = the sum of the gross value added at factor cost plus all taxes on products, less all subsidies on products, plus all other taxes on production, less all other subsidies on production.

In cases (b) and (c), the items taxes on products and subsidies on products includes taxes and subsidies on imports as well as on outputs.

Also See

GDP / National Accounts Revised Series with 2011-12 as base year

Source: Ministry of Statistics and Programme Implementation, Eurostat, OECD Glossary of Statistical terms, EPW Research Foundation (February 14, 2015 publication) UN System of National Accounts-2008

Gross Domestic perplexity, Arvind Virmani, Indian Express, 13 June 2016

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