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    Value Added Problem

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    "What value added means is not a higher price for certain goods. Value added means adding value to a raw product at its present stage of production and possibly taking that product to the next stage of production. It is basically the difference between the income received from the sale of the various products or services of a business or company and the expenses incurred in buying materials from outside sources to produce those products and services.
    Therefore, value added is not related to the fact the customer can or cannot afford to buy different good, there is no such thing as value added goods in the strict sense. "

    1) I still don't understand however, why it is that as an economy grows it produces more value added goods. The explanation above implies that a higher value added product means that the spread between the cost of the inputs (required to produce) and the income received is larger - 2)again, does this not mean that people in that economy have to be richer to afford this new high value added good?

    Could someone please clarify for me.

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    Solution Preview

    I think you are confusing value-add with price to a certain extent. The term value added does not define the price of the good in anyway. Another possible confusion is that the definition of high value added and low value added isn't really one that differs across economies.

    Its not that one good is high value added in the USA and low value added in the Ukraine its that the two countries are producing DIFFERENT GOODS.

    For example, to make a car the raw materials are iron ore which is mined and then smelted into steel before being formed into car bodies.

    Digging the iron ore out of the ground is low value ...

    Solution Summary

    The solution determines the value added.