The value added of a firm is calculated as ________.
Show answer & explanation
Correct answer: A
Explanation
The correct answer is Option 1 i.e. value of production of the firm – value of intermediate goods used by the firm
The value added of a firm represents the additional value created during the production process. It is calculated as:
Value Added = Value of Production – Value of Intermediate Goods.
Intermediate goods are raw materials or components used in the production of final goods. The value added shows the net output of the firm and reflects its contribution to the economy. This concept is crucial in calculating GDP using the production method. It avoids double counting by subtracting the input costs of materials already produced by other firms.
Explanation of Other Options
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Option 2: Capital goods are durable assets, not consumed during production, and are not added to value directly.
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Option 3: Division (/) is incorrect for value-added calculation—it is a subtraction-based formula.
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Option 4: Adding intermediate goods to production value would overstate total value and lead to double counting.
Thus, only Option 1 correctly reflects the concept of value addition in production.