value added
Think about a wooden table on sale for 200 dollars. The forester sold logs to a sawmill, the sawmill sold planks to a carpenter, and the carpenter built and sold the table. If you naively added up every sale along that chain, you would count the wood several times over and get a wildly inflated number. Value added is the fix: at each stage you count only the new value that stage created, not the materials it bought in.
Value added is a firm's sales revenue minus the cost of the goods and services it bought from other firms (its intermediate inputs). Suppose the sawmill buys 30 dollars of logs and sells planks for 70; its value added is 70 minus 30, which is 40. The carpenter buys 70 of planks and sells the table for 200; her value added is 200 minus 70, which is 130. Add the forester's 30, the sawmill's 40 and the carpenter's 130 and you get 200, exactly the table's final price. That is why summing value added across all firms gives GDP without any double-counting, the heart of the output approach.
Value added matters far beyond accounting. It is how we judge how much a particular industry or firm really contributes to the economy, rather than how much money flows through it. A trading business with huge revenue but tiny margins may add little value, while a small design studio may add a lot. Value-added thinking also underlies value-added tax, a tax charged on the value created at each stage of production rather than on the full sale price each time.
A coffee shop pays 0.50 for beans, milk and a cup, and sells a latte for 4.00. Its value added on that cup is 4.00 minus 0.50, which is 3.50, the new worth it created by roasting, brewing and serving. Only this 3.50 belongs in GDP at the shop's stage.
Value added is sales minus bought-in inputs at each stage.
Value added is not the same as profit. It includes the wages paid to workers and other payments, not just what the owner keeps; profit is only one slice of the value a firm adds.