jnu 2011

[manisha sachdeva]

utenils worth rs 1500 are produced with steel costing rs 750 and other materials costing rs 150.labour cost of producing these utensils is rs 150 and depreciation machinery is 0.the value added producing these utensils will be?

[neha:)]

Hi Manisha!
When we compute 'value-added', we do not subtract the labour cost from final output. So the value added here would become 1500 -750 - 150 = 600.

[manisha sachdeva]

can u please explain why have u subtracted the costs from the utensil production.
i have not understood the concept behind it.i wu\ould really appreciate if u could tell me

[neha:)]

See, there are two ways of looking at Value Added. One is to deduct the cost of raw materials from the final output at each stage of the production process.
i.e value added = value of output - cost of intermediate good.

Now after subtracting the cost of depreciation, this additional amount of value that is obtained via the production process at a particular stage needs to be distributed among the factors of production. The producer will decide how much amount of this added value to keep as profits, and how much to disburse to the factors of production as a compensation for their services. So the second way to look at value added could be as follows: Value added =  Profits + Factor payments (including labour cost) + Depreciation.

Hence, labour cost is a part of value added itself, and thus cannot be deducted from value added when we need to find the value added! Hope this helps..

[manisha sachdeva]

that is so swwet of u to type such a lengthy msg.

thnkew so much.

oe more thing wat all factor payments include?

On Sat, May 3, 2014 at 11:20 PM, neha:) [via Discussion forum] <[hidden email]> wrote:

See, there are two ways of looking at Value Added. One is to deduct the cost of raw materials from the final output at each stage of the production process.
i.e value added = value of output - cost of intermediate good.

Now after subtracting the cost of depreciation, this additional amount of value that is obtained via the production process at a particular stage needs to be distributed among the factors of production. The producer will decide how much amount of this added value to keep as profits, and how much to disburse to the factors of production as a compensation for their services. So the second way to look at value added could be as follows: Value added =  Profits + Factor payments (including labour cost) + Depreciation.

Hence, labour cost is a part of value added itself, and thus cannot be deducted from value added when we need to find the value added! Hope this helps..

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[neha:)]

You are welcome! :)
Factors of payment include all the rewards to different factors of
production. i.e, Wages for labour, Rent for land, Interest for capital
used, and profits for the entrepreneur.