Production and Income

Value added is also important for the income generated by productive factors in the transformation of raw materials and natural resources into final goods. The income received by owners of the factors of production (labor, capital, land, and entrepreneurship) corresponds with the value added by the particular factor. In other words, workers who add greater value to a final good generally receive higher incomes.

For example, Harold "Hair Doo" Dueterman, the superstar baseball player for the Shady Valley Primadonnas, receives a greater income than Edgar Millbottom, a taco-making employee of Waldo's TexMex Taco World, because the value of the baseball entertainment produced by Hair Doo is greater than the value of the tacos produced by Edgar.

Adding Stuffed Value

In addition to these intermediate goods, The Wacky Willy Company also uses the four basic factors of production. Labor includes a staff of 300 employees. Capital includes the Wacky Willy factory and equipment. Land includes the land on which the factory rests. Entrepreneurship includes the founder and president of The Wacky Willy Company, William J. Wackowski.

These factors of production are responsible for adding value to the intermediate goods. The Wacky Willy Company buys the fabric, thread, and gelatinous substance as intermediate products, which it then transforms into more valuable Stuffed Amigos.

Stuffed Amigo Production
Production Input	Value
Intermediate Goods	$4.00
Labor	$5.00
Capital	$3.00
Land	$0.50
Profit	$2.45
Total Value	$14.95
Value Added	$10.95

The table to the right presents a breakdown of the revenue received by The Wacky Willy Company for the sale of one Stuffed Amigo and the cost incurred in its production. The sales price is $14.95. This is the revenue collected by The Wacky Willy Company. More notably this is the value placed on this product by the buyer. And most important of all, this value is included as part of gross domestic product.

The production of the Stuffed Amigo is divided into five categories. One is the cost of purchasing intermediate goods (fabric, thread, and stuffing). The next three is the cost of using the factors of production (labor, capital, and land). The last item listed is profit, the difference between the revenue received and the total cost. More on profit later.

The cost of acquiring the three intermediate goods is $4. This $4 is the value of these intermediate goods when purchased from OmniTextiles (fabric), MegaThread (thread), and Ooze, Inc. (gelatinous stuffing). The function of The Wacky Willy Company is to add value to these intermediate goods, which they do by transforming these material inputs into a highly valued Stuffed Amigo.

In particular, the value added by The Wacky Willy Company is $10.95, the difference between the $4 worth of intermediate goods and the $14.95 price for the final good. This value is added by the factors of production. How much value added by each factor can be determined by noting its "cost." Labor adds $5 worth of value, capital adds $3 of value, and the land adds $0.50 of value. These cost items are also the income received by the owners of each factor.