Determination of Value Added and Significance to Product and Markets - Research Paper Example

?Calculating Value Added Determination of value added and significance to product and markets Introduction To start with, the framework of value added in broad terms refers to the studies of Pigou and Bernard Cox. They suggested that determination of Value Added is crucial in calculating classical national accounts. By 1920, Pigou had made an interpretation of value added that comprised the ability to calculate the paycheck of a firm; while the sales turnover is not exact given that the expenditures are not considered. In this instance, he established that value added is essentially the subtraction of the output linked to the inputs. Therefore, outputs that are not determined by one self are not put into consideration (Sheikh, & Tonak, 2002). Marxist and neoclassical methods of determining value added B. Cox in 1979 agreed in his book called “value added” that Pigou’s definition went further in explanations. He construed value added in two diverse perspectives: the additive and the subtractive. In one, instance, the subtractive value added, is determined by taking away material purchases and services from revenue from sales. The value added signifies its creation. In addition, additive value added is deliberated by accumulation of labour cost (consisting of social charges), operating profit and depreciation. This permits the estimation methods where the created profit is distributed. Goods and services are (Samuelson, & Nordhaus, 2004) exchanged in business system; thus a market product entails a market where products are traded (especially to firms). Thus, product market and business are interrelated given that the business permits products to be traded in markets. Besides, vertical integration and value added are correlated. Indeed, if a company opts to vertical integration, its Value added ratio increases. However, many companies do not create their own products in entirety. An addition or change made by a business regarding a product or process prior to reaching the point of purchase or customer. In a situation where there is change in business value-added, there will be an increase in the quality and value of the process or products. However, the fact of the change in itself is not obvious to the customer (Palmer, 1998). The concept of Karl Marx where the value product is the same as the national accounting concept of determining net value added. It is obtained through subtracting the value of the gross product and expenditure on constant capital. The latter represents depreciation and the costs of intermediate products. In rotation, value added equals the summation of variable capital (compensation of labor) and surplus-value (which is pre-tax profit income). The case is that labor generates value added (a new value) that comprises the cost of own wages i.e. payment for the ability of workers perform labor (labor power) and property income (surplus-value). In Marx's case, provided in Das Kapital thesis, workers apply sufficient labor-time within a working day so as to pay for proliferation costs where their ability to work in that day (labor-power) is judged by the extra work or surplus-labor required to compensate incomes to land-owners and capitalists among others (Deardorff, 2003). Given that labor is active and highly conscious factor in the process of production, capital goods which is the means of production together with gifts from nature like land and natural resources, facilitates the ability of labor to transform raw materials into finished products. It raises the physical productivity of labor regarding its ability to generate use-values alongside value-productivity. The latter is the ability to generate use-values that can be traded for money (Yanovsky, 1999). On the contrary, neoclassical economics deem the incomes comprising added value as the prize for services provided. While critiquing the political economy, Marx observed incomes as consequences of production subject to circumstances of capitalist exploitation. In the capitalist class, they control the production process and the economic growth (capital accumulation) provides them with the power to assert the payback of the extra labor performed by the workforce. Enforced by the ordinary presence of mass unemployment, Marx termed them as the reserve army of labor. For instance, $10 Miso soup is prepared by a chef using pots, stove and pans through conversion of $5 Tofu and other elements. The chef and his tools comprise the factors of production and Tofu as well as other ingredients not included is the intermediary goods employed and transformed into part of the soup. The Tofu employed was transformed through $2 of soy beans. These soy beans are form part of the raw material used up and transformed into the Tofu. Taking the assumption that the soy beans were grown and harvested in the same year, the $2 determines the value added in the sector. Therefore, the beans are assumed to be primarily the result of services from the factors of production (Deardorff, 2003). Where national accounts are involved, gross value added is generated by deducting transitional expenditure from gross output. As a result, gross value added equals net output. Net value added is achieved by subtracting expenditure of fixed capital (depreciation charges) away from the gross value added. The resulting net value added equals indirect taxes fewer subsidies, gross wages, and pre-tax profits net of depreciation (Deardorff, 2003). Value added as the principal component for business and its product market Value added refers to the extra value produced at a certain stage of production or by image and marketing. In present neoclassical economics, particularly in macroeconomics, it is the input of the factors of production, like labor, land, and capital goods. They raise the product value so as to correspond to the incomes obtained by the owners of factors of production (Samuelson, & Nordhaus, 2004). These factors offer services which increase the unit product price say (X) that is relative to the intermediate goods cost per unit incurred in the production of product X. Value added is distributed among the factors of production like working capital, human capital and labor. They give rise to matters of distribution. In understanding the idea of value added, taking an example of three basic stages of production will help. Value-Added Products easily takes advantage of value adding prospects by solving the questions as to why Value-Addition of Products Fail. Value-Added also improves the marketing strategies involving product sales. In a customer-driven process, the producer retains more of the product dollar through enhancing, processing, packaging and marketing the product her/himself. Value-added can involve production methods with the latest technology, procedures and methods. As a result, the value-added products acquire a new brand. Making a decision on Value-Added help to increase manufacturers’ viability, visibility and expand the market season through the opening of new markets. Though there are considerable risks associated with value adding than the sale of bulk commodity, benefits outweigh the costs. There will be higher profits and one is able to master his or her own destiny. Competition usually responds with a vengeance, so if the product runs successfully and becomes a serious threat to its market share, then ideally the product is vital (Palmer, 1998). The characteristic features of one’s business; product or service is embedded in the amount of benefits offered by the product. It dictates who will buy and at what price. It also helps to match the product traits with customers’ needs since producers regard their product as the ultimate result of their work. What is exceptionally sought is a different end product that satisfies customer (Deardorff, 2003). Getting customers to take money out of their pockets is the objective of value addition. To conquer the product market, promotion is crucial to allocate a unique selling proposition. It allows producers to have many customers coming his or her way as opposed to competitors. Value-Added marketing (product marketing) is not only about marketing what is being produced but also doing everything to promote the business from the time of conception to the point where customers buy the product or service. From then on they can begin to patronize the business on a constant basis. Establishing market niches is about mastering methods of marketing, customers and their needs. Guerrilla marketing is one such example that the concept of Value-Added informs the niche markets. The principle to finding a successful niche markets is to find a market that are materially unique from the mass market but in the same class large enough to give sufficient sales for profitability (Deardorff, 2003). However, it can be too small to draw mass production and distribution. Products where a wholesaler is involved, anticipates earning between 10 and 15 percent of the retail price. Direct Marketing can be in the form of producers’ retail outlets, mail order catalogs, ecommerce websites, gift shops, producers markets and particular grocery stores or craft shows. However, value-added products mostly fail because they do not match or gratify a customer’s needs or wants. One may be starting a business or making a job. It is crucial to supply an adequate amount of the product at the preliminary delivery. The product must be delivered on a constant basis so as to meet strict delivery schedules. Appropriate shelf space should justify the product so as to encourage sales. For successful marketing through value addition, investing in value-added marketing brings out the desire of high quality products. Establishing the quantity of high quality products help to process and deliver on a regular basis. Product placement is then matched with the volume in sales (Deardorff, 2003). In some situations, the emperor may be naked i.e. many claims regarding the sales potential of value-added products is overly enthusiastic. Honest accounting of products is honed by the time spent in the business will demand. Product price and convenience matter where many customers support locally produced goods. The real world recommends that price and convenience matter to all customers, though seasonality may be a serious handicap. Some customers, like large corporations may not easily put up with seasonality (Yanovsky, 1999). Resources are required to meet the rigors of cut throat competition by going unique in product value addition. Differentiation in the market helps to capture niches, thus eliminating product extremes where no one is enthusiastic to provide financial support. Reference list Deardorff, A 2003, Deardorff's Glossary of International Economics, New York: Allan and Wayne. Palmer, E Z 1998, The meaning and measurement of the national income, and of other social accounting aggregates. Yale, John Wiley and sons Samuelson, P A. & Nordhaus, W D 2004, Economics. "Glossary of Terms," Value added. Hodge Publishers Sheikh, A & Tonak, A E 2002, Measuring the Wealth of Nations. CUP. Yanovsky, M 1999, Anatomy of Social Accounting Systems. Routledge Read More