Construction Economics

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4.
The term value added is used to describe the value of a good at a particular stage of production, compared to the value of the product at the previous stage of production. This value can be measured in monetary terms and provides an alternative way to calculate the total value of the production of a commodity. The point to be emphasized here is that while the value added can be compared in terms of value of the product at the first stage of production and at its last stage of the product, that is the output itself, it can also be calculated on a step-by-step production level basis. To illustrate, suppose a production process has four stages, starting from raw materials, to usable inputs and intermediate inputs, before culminating into the final product. Let’s also assume that the raw the monetary value of the product at the four stages are 10, 17, 23 and 31 respectively. So, while the total value added is 21 (31- 0), we can also see that the series of value added at each production step is 10, 7, 6 and 8 respectively. If we add these four individual step value added, we get the same number as that of total value added (10+7+6+8 = 31). Therefore, summation of value addition at each step is equivalent to total value added. One very relevant and practical use of value addition is applied in the calculation of Gross Domestic Product (GDP), where we calculate the value addition at the economy wide level and hence, derive the total GDP. The concept of surplus value is more abstract than value added. The surplus value can be best explained by the famous M-C-M’ mechanism of Marx (Encyclopedia Britannica, 2008). In the M-C-M’ mechanism, a certain amount of capital (in money form) is put into the production process, the monetary value of which can be indicated as M. Now, during the production process, this monetary value is converted in the form of capital and labor costs. After the production process, the commodity produced has a monetary value, which can be measure in monetary terms and can be described as M’. Here, M’ is usually greater than M. Now, while the value of capital remains fixed, there is additional value being generated in the system. This value is generated by labor input; as capital value is constant (Assuming no depreciation is the short run). The point to be noted here is that workers usually are paid enough only for their subsistence and the additional value created is higher than the wages being disbursed. So, in mathematical terms, M’-C > w, where w is the total wage expenditure. This additional value, M’-C-w, is referred to as the surplus value being generated by Marx. It can also be interpreted in the following manner. The labor being put in production can be divided in terms of the labor time being put in to generate the wages for the workers and the surplus labor time which is put in over and above the wages requirement. In that case, the workers work for partial amount of their work hours for generating their wage equivalent and rest of their work hours on generating the surplus value. The lower the wage rate and higher the productivity of labor, higher the surplus value generated. During a construction project there are many factors among which there exists a fine balance. For example, while there are issues directly related to the construction process like labor supply and wages being paid along with the number of labor hours being put it, there are external factors like sentiments of the local residents, weather, security concerns and then there are issues related to consumer process like the likeability of the end product by the consumers and demand for changes/alterations in major or minor ways. Therefore, it is evident that the disputes can originate from several sources, both from the internal or external sources during the production process and also due to transactions issues with contractors or the consumer taste preferences with the final production [Cheung (1999)]. Any of these...
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