Economic value added

Economists like to specify production functions that say output depends on various inputs such as capital and labour. They may write Y = F(K,L) or Y = Y(K,L). They also specify a budget, stating how much the inputs cost and how much money there is to buy them, such as a*K + b*L = total funds for purchase.

The output Y is different from the cost of inputs. The difference between the two is the value added in the economy or company producing the output. Value added arises from the organisation of the inputs to produce the output (some economists refer to the organisation as technology, although others keep the term technology for a particular part of the organisation). The value added is taken by the organisers (who may also provide the capital and labour). If Y is measured by K multiplied by L, say, then although the production function mentions only K and L there is still organisation used as the value added is greater than zero. The only time that there is no organisation is when the output equals the cost of the inputs.