1. Production as an economic activity

• 6.6. Production can be described in general terms as an activity in which an enterprise uses inputs to produce outputs. However, it is necessary to specify what is meant by “input” and “output” to make such a description more operational. The economic analysis of production is mainly concerned with activities that produce outputs of a kind that can be delivered or provided to other institutional units. Unless outputs are produced that can be supplied to other units, either individually or collectively, there can be no division of labour, no specialization of production and no gains from trading. There are two main kinds of output, namely goods and services, and it is necessary to examine their characteristics in order to be able to delineate activities that are productive in an economic sense from other activities.

2. The production boundary

• 6.14. Given the general characteristics of the goods and services produced as outputs, it becomes possible to define production. A general definition of production is given first, followed by the rather more restricted definition that is used in the System.

1. Introduction

• 6.37. In the System, the intermediate inputs are recorded and valued at the time they enter the production process, while outputs are recorded and valued as they emerge from the process. Intermediate inputs are normally valued at purchasers’ prices and outputs at basic prices, or alternatively at producers’ prices if basic prices are not available. The increase between the value of the intermediate inputs and the value of the outputs is the gross value added against which must be charged the consumption of fixed capital, taxes on production (less subsidies) and compensation of employees. The positive or negative balance remaining is the net operating surplus or mixed income. The definition, measurement and valuation of outputs and inputs is, therefore, fundamental to the System and is described in detail in the following sections.

2. Output (P.1)

• 6.38. Certain goods and services produced by processes of production, including services produced by ancillary activities, are used up within the same accounting period by other processes carried out within the same establishment. Such goods and services do not leave the establishment and are therefore not counted as part of the establishment’s output. Thus, output is a concept that applies to a producer unit—an establishment or enterprise—rather than a process of production. Output has to be defined in the context of a production account, and production accounts are compiled for establishments or enterprises, and not for processes of production. Output therefore consists only of those goods or services that are produced within an establishment that become available for use outside that establishment. When an enterprise contains more than one establishment, the output of the enterprise is the sum of the outputs of its component establishments.

• 6.39. For simplicity, the output of most goods or services is usually recorded when their production is completed. However, when it takes a long time to produce a unit of output, it becomes necessary to recognize that output is being produced continuously and to record it as “work-in-progress”. For example, the production of certain agricultural goods or large durable goods such as ships or buildings may take months or years to complete. In such cases, it would distort economic reality to treat the output as if it were all produced at the moment of time when the process of production happens to terminate. In any case, whenever a process of production, however long or short, extends over two or more accounting periods, it is necessary to calculate the work-in-progress completed within each of the periods in order to be able to measure how much output is produced in each period.

• 6.40. Output in the form of finished goods or services is ready to be supplied or provided to other institutional units. However, work-in-progress consists of output which, by definition, is not complete and, therefore, is not yet in a state in which it is normally marketed. In due course, however, the work-in-progress is transformed into a finished product that is marketable

• 6.41. Goods or services produced as outputs may be used in several different ways and by listing these uses it is possible to obtain a clearer indication of the coverage of output. Apart from certain service producers, such as financial intermediaries and wholesale and retail traders whose outputs have special characteristics, goods or services produced as outputs must be disposed of by their owners in one or more of the following ways during the period in which they are produced:

  • (a) They may be sold: (only goods or services sold at economically significant prices are included here);

  • (b) They may be bartered in exchange for other goods, services or assets, provided to their employees as compensation in kind, or used for other payments in kind;

  • (c) They may enter the producer’s inventories prior to their eventual sale, barter or other use: incomplete outputs enter the producer’s inventories in the form of additions to work-in-progress;

  • (d) They may be supplied to another establishment belonging to the same enterprise for use as intermediate inputs into the latter’s production;

  • (e) They may be retained by their owners for own final consumption or own gross fixed capital formation;

  • (f) They may be supplied free, or sold at prices that are not economically significant, to other institutional units, either individually or collectively.

• 6.42. The entire output of an establishment or enterprise must be used in one or other of the above ways. For example, some of the crop produced by a farmer may be sold or bartered; some may be used for final consumption by members of the farmer’s household; while the remainder may be put into inventory for future sale or use.

• 6.43. In practice, some of the goods sold or otherwise used within any given accounting period may have been withdrawn from inventories of goods produced in previous periods. Thus, in the normal situation in which the available accounting data on sales or other uses refer to the total sales or other uses in that period, it is necessary to deduct the value of such withdrawals from the value of total sales or uses to obtain the output of the period in question. It is therefore necessary to record the value of changes in inventories, i.e., entries less withdrawals, and not simply additions to inventories. This leads to the well-known accounting identity:

  • the value of output = the value of total sales or other uses of goods or services produced as outputs + the value of changes in the inventories of goods produced as outputs.

1. Recording of sales

• 6.54. The times at which sales are to be recorded are when the receivables and payables are created: that is, when the ownership of the goods passes from the producer to the purchaser or when the services are provided to the purchaser. The goods or services are valued at the basic prices at which they are sold. If valuation at basic prices is not feasible, they may be valued at producers’ prices instead. The values of sales are determined by the amounts receivable and payable by the producers and purchasers, which do not always coincide with the amounts actually received and paid. When payments are made in advance or in arrears, the values of sales should not include any interest or other charges incurred by the producer or purchaser. Such charges are recorded as separate transactions.

2. Recording of barter

• 6.55. Barter occurs when goods and services are exchanged for other goods, services or assets. The value of goods or services bartered should be recorded when the ownership of the goods is transferred or the services are provided: they should be valued at the basic prices that would have been received if they had been sold.

3. Recording of compensation in kind or other payments in kind

• 6.56. Goods or services provided to employees as compensation in kind, or used for other payments in kind, should be recorded when the ownership of the goods is transferred or the services are provided. They should be valued at the basic prices that would have been received if they had been sold.

4. Changes in inventories of outputs

5. Deliveries between establishments belonging to the same enterprise

• 6.80. As explained in chapter V, an establishment is an enterprise, or part of an enterprise, that is situated in a single location and in which only a single (non-ancillary) productive activity is carried out or in which the principal productive activity accounts for most of the value added. It may coincide with an enterprise, or be part of an enterprise, in which case it may be producing goods or services for the use of other establishments belonging to the same enterprise.

• 6.81. Goods or services produced and consumed within the same accounting period and within the same establishment are not separately identified and, therefore, not recorded as part of the output or intermediate consumption of that establishment. On the other hand, goods which are produced by an establishment and remain in inventory at the end of the period in which they are produced must be included in output, whatever their subsequent use. If they are intended to be used within the establishment subsequently, they should be recorded as work-in-progress: this implies that they are not recorded as intermediate consumption in the period in which they are withdrawn from inventories.

• 6.82. Goods and services that one establishment provides to a different establishment belonging to the same enterprise are counted as part of the output of the producing establishment. Such goods and services may be used for intermediate consumption by the receiving establishment, but they could also be used for gross fixed capital formation. The goods and services should be valued by the producing establishment at current basic prices; the receiving establishment should value them at the same prices plus any additional transportation costs paid to third parties. The use of artificial transfer prices employed for internal accounting purposes within the enterprise should be avoided, if possible.

• 6.83. The accounts and tables of the System include production accounts for groups of enterprises and groups of establishments, i.e., for both sectors and industries. In order to ensure that the total output and total intermediate inputs of an enterprise are the same as the corresponding totals for the establishments which make up that enterprise, the enterprise totals must include any inter-establishment deliveries of goods and services.

Output of services for own consumption

• 6.87. In practice, the recording of the production of services for own consumption is less common than for goods. Most of the services produced for own consumption by an enterprise (e.g., transportation, storage, maintenance, etc.) are produced by ancillary activities and are thus not separately identified or recorded either under the output or the intermediate consumption of the establishment or the enterprise to which it belongs. Domestic or personal services produced by members of households for each other are, by convention, treated as falling outside the production boundary of the System. There are, however, two specific categories of services produced for own final consumption whose output must be valued and recorded.

Valuation of the total output of other non-market producers

• 6.92. Government units and NPISHs may be engaged in both market and non-market production. Whenever possible, separate establishments should be distinguished for these two types of activities, but this may not always be feasible. Thus, a non-market establishment may have some receipts from sales of market output produced by a secondary activity: for example, sales of reproductions by a non-market museum. However, even though a non-market establishment may have sales receipts, its total output covering both its market and its non-market output, is still valued by the production costs. The value of its market output is given by its receipts from sales of market products, the value of its non-market output being obtained residually as the difference between the values of its total output and its market output. The value of its receipts from the sale of non-market goods or services at prices that are not economically significant remain as part of the value of its non-market output.

1. Introduction

• 6.93. The general rules governing the recording and valuation of output are not sufficient to determine the way in which the output of certain kinds of industries, mostly service industries, such as wholesale and retail trade and financial intermediaries, are measured. The following sections therefore provide further information about the measurement of the output of a number of specific industries. For convenience, the industries concerned are given in the same order as they appear in the ISIC.

2. Agriculture, forestry and fishing

• 6.94. First, it should be noted that the growth of crops, trees, livestock or fish which is organized, managed and controlled by institutional units constitutes a process of production in an economic sense. Growth is not to be construed as a purely natural process which lies outside the production boundary. Most processes of production merely exploit natural forces for economic purposes: for example, hydroelectric plants exploit rainfall and gravity to produce electricity.

• 6.95. The measurement of the output of agriculture, forestry and fishing is complicated by the fact that the process of production may extend over many months, or even years. Growing crops, standing timber, and stocks of fish or livestock reared for purposes of food have to be treated as work-in-progress—that is, as output which is not yet sufficiently processed to be in a form which is ready to be marketed. When the crops are harvested, the trees felled, or the livestock slaughtered, the process of production is completed and the work-in-progress is transformed into inventories of finished products ready for sale or other use. Conceptually, therefore, output in agriculture, forestry and fishing can be measured in exactly the same way as other types of production which take a long time to complete, i.e., by the value of sales plus other uses plus changes in inventories including additions to work-in-progress. Output should be recorded as being produced continuously over the entire period of production and not simply at the moment of time when the process is completed, i.e., when the crops are harvested or animals slaughtered.

• 6.96. Assume the process of production takes several periods (months, quarters, or years, as the case may be) to complete. The value of the output produced in each period can then be measured as work-in-progress by distributing the value of the finished agricultural products (harvested crops, slaughtered animals, etc.) in proportion to the costs incurred each period. For this purpose, farms that are corporate enterprises need to be distinguished from those that are unincorporated (presumably the great majority of farms in most countries). The output of corporate farms can be distributed in proportion to the actual costs incurred each period, including compensation of employees. However, in the case of unincorporated farms, unpaid labour inputs provided by the owner(s) may account for much of the real costs incurred. The allocation of the finished output of these farms may be accomplished as follows. First, actual costs (expenditures on seed, fuels, etc.) are allocated to the periods in which they were incurred. Secondly, the remaining part of the value of the finished output, i.e., the realized mixed income—is distributed in proportion to the unpaid hours worked by the owner(s). For this purpose, rough indicators of the relative amounts of work done in different periods may be sufficient. The value of the finished products is given by the sum of the values of the following three items:

  • (a) Finished products sold or bartered valued at current basic prices;

  • (b) Entries of finished products into inventories, less withdrawals, valued at current basic prices;

  • (c) Finished products used by their producer for final consumption, valued at current basic prices.

• 6.97. When the value of the finished products is distributed as work-in-progress it is essential also to record the reduction in work-in-progress which takes place at the moment when the production is completed and the work-in-progress is transformed into finished agricultural products. Otherwise, output would be recorded twice: first as additions to work-in-progress and then as sales, barter or additions to inventories of finished products. The negative figure for the reduction in work-in-progress cancels out the value of the finished products sold, bartered or entered into inventories so that no output is recorded at the moment when the production process is terminated, all of it having been previously recorded as additions to work-in-progress during the period of production.

• 6.98. If the entire production process is completed within a single accounting period, such as a year, it may be unnecessary to distribute the output as work-in-progress in the way described above. However, if the accounting period ends before the process is completed, or if accounts have to be compiled for sub-periods such as quarters, the total value of the finished products has to be distributed as work-in-progress. It must be remembered that the corresponding inputs into the same production process are in fact distributed over time and recorded in the different periods or sub-periods. Thus, if outputs are not similarly distributed as work-in-progress, inputs are recorded without outputs, in which case economically meaningless figures are liable to be recorded for value added, operating surplus or mixed income and balance of primary incomes. Moreover, it may be necessary to record work-in-progress, even when the production process is completed within a single accounting period, in order to obtain an appropriate match between the values of inputs and outputs when the general price level is rising strongly within the accounting period.

3. Machinery, equipment and construction

• 6.101. The production of large durable goods such as ships, heavy machinery, buildings and other structures may take several months or years to complete. The output from such production must, therefore, usually be measured by work-in-progress and cannot be recorded simply at the moment in time when the process of production is completed. The way in which work-in-progress is to be recorded and valued has been explained in earlier sections of this chapter, including the preceding section on agricultural output.

• 6.102. It is worth noting, however, that when a contract of sale is agreed in advance for the construction of a building or other structure extending over several accounting periods, the output produced each period is treated as being sold to the purchaser at the end of the period: i.e., as a sale rather than work-in-progress. In effect, the output produced by the construction contractor is treated as being sold to the purchaser in stages as the latter takes legal possession of the output. It is therefore recorded as gross fixed capital formation by the purchaser and not as work-in-progress by the producer. When the contract calls for stage payments, the value of the output may often be approximated by the value of stage payments made each period. In the absence of a contract of sale, however, the incomplete output produced each period must be recorded as work-in-progress.

4. Transportation and storage

5. Wholesale and retail distribution

• 6.110. Although wholesalers and retailers actually buy and sell goods, the goods purchased are not treated as part of their intermediate consumption when they are resold with only minimal processing such as grading, cleaning, packaging, etc. Wholesalers and retailers are treated as supplying services rather than goods to their customers by storing and displaying a selection of goods in convenient locations and making them easily available for customers to buy. Their output is measured by the total value of the trade margins realized on the goods they purchase for resale. A trade margin is defined as the difference between the actual or imputed price realized on a good purchased for resale and the price that would have to be paid by the distributor to replace the good at the time it is sold or otherwise disposed of. The margins realized on some goods may be negative if their prices have to be marked down. They must be negative on goods that are never sold because they go to waste or are stolen.

• 6.111. The standard formula for measuring output has to be modified for wholesalers or retailers by deducting from the value of the goods sold or otherwise used the value of the goods that would need to be purchased to replace them. The latter include the additional goods needed to make good recurrent losses due to normal wastage, theft or accidental damage. In practice, the output of a wholesaler or retailer is given by the following identity:

  

  	the value of output = the value of sales, including sales at reduced prices
  plus	the value of other uses of goods purchased for resale
  minus	the value of goods purchased for resale
  plus	the value of additions to inventories of goods for resale
  minus	the value of goods withdrawn from inventories of goods for resale
  minus	the value of recurrent losses due to normal rates of wastage, theft or accidental damage.

  View Table

  	the value of output = the value of sales, including sales at reduced prices
  plus	the value of other uses of goods purchased for resale
  minus	the value of goods purchased for resale
  plus	the value of additions to inventories of goods for resale
  minus	the value of goods withdrawn from inventories of goods for resale
  minus	the value of recurrent losses due to normal rates of wastage, theft or accidental damage.

• 6.112. The following points should be noted:

  • (a) Goods sold are valued at the prices at which they are actually sold, even if the trader has to mark their prices down to get rid of surpluses or avoid wastage;

  • (b) Goods provided to employees as remuneration in kind should be valued at the current purchasers’ prices payable by the traders to replace them; that is, the realized margins are zero. Similarly, goods withdrawn by the owners of unincorporated enterprises for their own final consumption should be valued at the current purchasers’ prices payable by the traders to replace them;

  • (c) Goods purchased for resale should be valued excluding any transport charges invoiced separately by the suppliers or paid to third parties by wholesalers or retailers: these transport services form part of the intermediate consumption of the wholesalers or retailers;

  • (d) Additions to inventories of goods for resale should be valued at the prices prevailing at the time of entry;

  • (e) Goods withdrawn from inventory of goods for resale should be valued at the prices prevailing at the time they are withdrawn (as distinct from the prices at which they were originally purchased and entered inventories). Goods withdrawn from inventory include recurrent losses due to normal rates of wastage, theft or accidental damage; goods lost are valued in the same way as goods withdrawn for sale.

• 6.113. The margins realized on goods purchased for resale thus vary according to their eventual use. The margins realized on goods sold at the full prices intended by the traders could be described as the normal margins. In fixing these margins, traders take account not only of their ordinary costs such as intermediate consumption and compensation of employees but also of the fact that some goods may ultimately have to be sold off at reduced prices while others may go to waste or be stolen. The margins realized on goods whose prices have to be marked down are obviously less than the normal margins and could be negative. The margins on goods used to pay employees as compensation in kind or withdrawn for final consumption by owners are zero because of the way these goods are valued. Finally, the margins on goods wasted or stolen are negative and equal to the current purchasers’ prices of replacements for them.

• 6.114. The average margin realized on goods purchased for resale may thus be expected to be less then the normal margin—possibly significantly less for certain types of goods such as fashion goods or perishable goods. Finally, it should be noted that margins are defined to exclude holding gains or losses on goods for resale while they are being held in inventory by wholesalers or retailers. As in the case of other types of production, holding gains and losses are excluded from output by valuing all entries to, or withdrawals from, inventories at the prices prevailing at the times the entries or withdrawals take place.

6. Operating leasing

• 6.115. The activity of renting out machinery or equipment for specified periods of time which are shorter than the total expected service lives of the machinery or equipment is termed operating leasing. It is a form of production in which the owner, or lessor, provides a service to the user, or lessee, the output of which is valued by the rental which the lessee pays to the lessor. Operating leasing has to be clearly distinguished from financial leasing, which is not itself a process of production but a method of financing the acquisition of fixed assets.

• 6.116. Operating leasing can be identified by the following characteristics:

  • (a) The lessor, or owner of the equipment, normally maintains a stock of equipment in good working order which can be hired on demand, or at short notice, by users;

  • (b) The equipment may be rented out for varying periods of time. The lessee may renew the rental when the period expires and the user may hire the same piece of equipment on several occasions. However, the user does not undertake to rent the equipment over the whole of the expected service life of the equipment;

  • (c) The lessor is frequently responsible for the maintenance and repair of the equipment as part of the service which he provides to the lessee. The lessor must normally be a specialist in the operation of the equipment, a factor that may be important in the case of highly complicated equipment, such as computers, where the lessee and his employees, may not have the necessary expertise or facilities to service the equipment properly themselves. The lessor may also undertake to replace the equipment in the event of a serious or prolonged breakdown.

• 6.117. Thus, the service provided by the lessor goes beyond the mere provision of a piece of equipment. It includes other elements such as convenience and security which can be important from the user’s point of view. Operating leasing developed originally to meet the needs of users who require certain types of equipment only intermittently. However, with the evolution of increasingly complicated types of machinery, especially in the electronics field, the servicing and back-up facilities provided by a lessor are important factors which may influence a user to rent. Other factors which may persuade users to rent over long periods rather than purchase are the consequences for the enterprise’s balance sheet, cash flow or tax liability.

7. Financial intermediaries except insurance corporations and pension funds

8. Insurance

• 6.135. The activity of insurance is intended to provide individual institutional units exposed to certain risks with financial protection against the consequences of the occurrence of specified events. It is also a form of financial intermediation in which funds are collected from policyholders and invested in financial or other assets which are held as technical reserves to meet future claims arising from the occurrence of the events specified in the insurance policies. Although insurance involves transfers in which funds are redistributed among institutional units, insurance enterprises also produce services that are paid for, directly or indirectly, by their policyholders. It is not easy to disentangle the different elements involved in the transactions between insurance enterprises and their policyholders and to record them appropriately in the System. Accordingly, a comprehensive explanation of insurance and pensions and the ways in which the various elements interact is given in annex IV at the end of this manual. The purpose of the present section is to explain how the output of the services produced by insurance enterprises is calculated and valued in the System.

• 6.136. Typically, insurance enterprises do not make a separate charge for the service of arranging the financial protection or security which insurance is intended to provide. Whenever insurance enterprises do make explicit charges to their policyholders or others, these are treated as payments for services rendered in the normal way. For those services for which no explicit charges are made the value of the services they provide has to be estimated indirectly, however, from the total receivables and payables of insurance enterprises, including the income accruing from the investment of their reserves.

• 6.137. Insurance enterprises build up technical reserves for several reasons. One is that insurance premiums are payable in advance at the start of each period covered by the policy so that insurance enterprises typically hold funds for a period of time before an eventuality giving rise to a payment occurs. This applies to non-life insurance as well as to life insurance. Another reason is that there is sometimes an important time-lag between the eventuality occurring and the payment of the subsequent claim taking place. In addition, insurance enterprises must hold considerable reserves in the form of actuarial reserves, including reserves on “with-profits” life policies, in respect of life insurance. The technical reserves built up for those reasons are invested in financial or non-financial assets, including real estate. The income generated by these investments in the form of the property income or net operating surpluses earned by renting residential or non-residential buildings has a considerable influence on the level of premiums insurance enterprises need to charge. The management of its investment portfolio is an integral part of the business of insurance which has a considerable bearing on the profitability and competitiveness of the enterprise.

• 6.138. The value of the total output of insurance services is obtained residually from an accounting relationship in which the following elements are involved:

  • (a) Actual premiums earned: these refer to those parts of the premiums payable in the current or previous periods which cover the risks incurred during the accounting period in question. They are not equal to the premiums actually payable during the accounting period, as only part of the period covered by an individual premium may fall within the accounting period in which it is payable. The prepayments of premiums, which refer to those parts of the premiums which cover risks in the subsequent accounting period or periods, form part of the technical reserves. Thus, total premiums earned are equal to premiums receivable less the value of the changes in the reserves due to prepayments of premiums;

  • (b) Income from investment of the insurance technical reserves, as described above. Although the reserves are held and managed by the insurance enterprises, they are treated in the System as assets of the policyholders. The income earned on the investment of the reserves is, therefore, attributed to the policyholders for whose benefit the reserves are held. The income is recorded as receivable by the policyholders who pay it all back again to the insurance enterprises as premium supplements. These premium supplements must therefore always be equal in value to the corresponding income from the investment of the technical reserves;

  • (c) Claims which become due for payment during the accounting period: claims become due when the eventuality takes place which gives rise to a valid claim; they are equal to claims actually payable within the accounting period plus changes in the reserves against outstanding claims;

  • (d) Changes in the actuarial reserves and reserves for with-profits insurance: these changes consist of allocations to the actuarial reserves and reserves for with-profits insurance policies to build up the capital sums guaranteed under these policies. Most of these reserves relate to life insurance but they may be needed in the case of non-life insurance when claims are paid out as annuities instead of lump sums.

  • All changes in insurance technical reserves referred to in (a), (c) and (d) are measured excluding any nominal holding gains or losses.

• 6.139. Items (a) and (b), i.e.:

  • Actual premiums earned; and

    Premium supplements (= income from investments)

  determine the total resources of an insurance enterprise arising from its insurance activities. Items (c) and (d), i.e.:

  • Claims due; and

    Changes in actuarial reserves and reserves for withprofits insurance

  determine the total technical charges to be met out of these resources. The difference between the total resources and total technical charges represents the amount available to an insurance enterprise to cover its costs and provide for an operating surplus. It is therefore taken as measuring the value of the output of services produced by the enterprise. Insurance enterprises take all the items (b) to (d) into consideration when fixing the levels of the premiums they charge in order to ensure that the excess of total resources over total charges provides sufficient remuneration for their own services.

• 6.140. Thus, the basic accounting used to estimate the value of the output of insurance services is as follows:

  

  	Total claims due
  plus	Changes in actuarial and reserves for with-profits insurance
  plus	Total actual premiums earned
  plus	Total premium supplements
  	= Value of the output of insurance services

  View Table

  	Total claims due
  plus	Changes in actuarial and reserves for with-profits insurance
  plus	Total actual premiums earned
  plus	Total premium supplements
  	= Value of the output of insurance services

  The value of the output of insurance services is determined residually as the item that balances both sides of the above account. The outputs of both life and non-life insurance services are estimated by means of this identity.

9. Autonomous pension funds

• 6.141. Autonomous pension funds are separate funds (i.e., separate institutional units) established for purposes of providing incomes on retirement for specific groups of employees which are organized, and directed, by private or public employers or jointly by the employers and their employees. These funds engage in financial transactions on their own account on financial markets and make investments by acquiring financial and non-financial assets. They do not include social security schemes organized for large sections of the community which are imposed, controlled or financed by general government. The output produced by pension funds is measured in the same way as that of insurance enterprises, as described above, except that in the case of pension funds, “premiums’ are generally described as “contributions”, while “claims” are generally described as “benefits”.

10. Research and development

• 6.142. Research and development by a market producer is an activity undertaken for the purpose of discovering or developing new products, including improved versions or qualities of existing products, or discovering or developing new or more efficient processes of production. Research and development is not an ancillary activity, and a separate establishment should be distinguished for it, when possible. The research and development undertaken by market producers on their own behalf should, in principle, be valued on the basis of the estimated basic prices that would be paid if the research were sub-contracted commercially, but is likely to have to be valued on the basis of the total production costs, in practice. Research and development undertaken by specialized commercial research laboratories or institutes is valued by receipts from sales, contracts, commissions, fees, etc. in the usual way. Research and development undertaken by government units, universities, non-profit research institutes, etc. is non-market production and is valued on the basis of the total costs incurred. The activity of research and development is different from teaching and is classified separately in ISIC. In principle, the two activities ought to be distinguished from each other when undertaken within a university or other institute of higher education, although there may be considerable practical difficulties when the same staff divide their time between both activities. There may also be interaction between teaching and research which makes it difficult to separate them, even conceptually, in some cases.

11. The production of originals and copies

• 6.143. The production of books, recordings, films, software, tapes, disks, etc. is a two-stage process of which the first stage is the production of the original and the second stage the production and use of copies of the original. The output of the first stage is the original itself over which legal or de facto ownership can be established by copyright, patent or secrecy. The value of the original depends on the actual or expected receipts from the sale or use of copies at the second stage, which have to cover the costs of the original as well as costs incurred at the second stage.

• 6.144. The output of the first stage is an intangible fixed asset that belongs to the producer of the original (author, film company, program writer, etc.). It may be produced for sale or for own-account gross fixed capital formation by the original producer. As the asset may be sold to another institutional unit the owner of the asset at any given time need not be the original producer, although they are often one and the same unit. If the original is sold when it has been produced, the value of the output of the original producer is given by the price paid. If it is not sold, its value could be estimated on the basis of its production costs with a mark-up. However, the size of any mark-up must depend on the discounted value of the future receipts expected from using it in production, so that it is effectively this discounted value, however uncertain, that determines its value.

• 6.145. The owner of the asset may use it directly or to produce copies in subsequent periods. Consumption of fixed capital is recorded in respect of the use of the asset in the same way as for any other fixed asset used in production.

• 6.146. The owner may also license other producers to make use of the original in production. The latter may produce and sell copies, or use copies in other ways; for example, for film or music performances. In these cases, the owner is treated as providing services to the licensees that are recorded as part of their intermediate consumption. The payments made by the licenses may be described in various ways, such as fees, commissions or royalties, but however they are described they are treated as payments for services rendered by the owner. The use of the asset is then recorded as consumption of fixed capital in the production of services by the owner. These services are valued by the fees, commissions, royalties, etc. received from the licensees.

1. Introduction

• 6.147. Intermediate consumption consists of the value of the goods and services consumed as inputs by a process of production, excluding fixed assets whose consumption is recorded as consumption of fixed capital. The goods or services may be either transformed or used up by the production process. Some inputs re-emerge after having been transformed and incorporated into the outputs; for example, grain may be transformed into flour which in turn may be transformed into bread. Other inputs are completely consumed or used up; for example, electricity and most services.

• 6.148. Intermediate consumption does not include expenditures by enterprises on valuables consisting of works of art, precious metals and stones and articles of jewellery fashioned out of them. Valuables are assets acquired as stores of value: they are not used up in production and do not deteriorate physically over time. Expenditures on valuables are recorded in the capital account. Intermediate consumption also does not include costs incurred by the gradual using up of fixed assets owned by the enterprise: the decline in their value during the accounting period is recorded as consumption of fixed capital. However, intermediate consumption does include the rentals paid on the use of fixed assets, whether equipment or buildings, that are leased from other institutional units, and also fees, commissions, royalties, etc., payable under licensing arrangements, as explained above.

• 6.149. Intermediate consumption includes the value of all the goods or services used as inputs into ancillary activities such as purchasing, sales, marketing, accounting, data processing, transportation, storage, maintenance, security, etc. The goods and services consumed by these ancillary activities are not distinguished from those consumed by the principal (or secondary) activities of a producing establishment even though the levels at which ancillary activities are carried out do not usually vary proportionately with the level of the principal activity.

2. The timing and valuation of intermediate consumption

• 6.150. The intermediate consumption of a good or service is recorded at the time when the good or service enters the process of production, as distinct from the time it was acquired by the producer. In practice, the two times coincide for inputs of services, but not for goods, which may be acquired some time in advance of their use in production. A good or service consumed as an intermediate input is normally valued at the purchaser’s price prevailing at the time it enters the process of production; that is, at the price the producer would have to pay to replace it at the time it is used. As explained in more detail in paragraphs 6.215 to 6.217, the purchaser’s price, at least in the case of certain goods, can be regarded as being composed of three elements:

  • (a) The basic price received by the producer of the good or service;

  • (b) Any transportation costs paid separately by the purchaser in taking delivery of a good at the required time and location plus the cumulative trade margin on a good which passes through the chain of wholesale or retail distribution;

  • (c) Any non-deductible tax (less subsidy) on the product payable on the good or service when it was produced or while in transit to the purchaser.

  For purposes of the System’s input-output tables, it may be necessary to distinguish all three elements but not in the accounts for institutional sectors or the central supply and use table.

• 6.151. In practice, establishments do not usually record the actual use of goods in production directly. Instead, they keep records of purchases of materials and supplies intended to be used as inputs and also of any changes in the amounts of such goods held in inventory. An estimate of intermediate consumption during a given accounting period can then be derived by subtracting the value of changes in inventories of materials and supplies from the value of purchases made. Changes in inventories of materials and supplies are equal to entries less withdrawals and recurrent losses on goods held in inventory. Thus, by reducing the value of changes in inventories recurrent losses increase intermediate consumption. Goods entering and leaving inventory are valued at the purchasers’ prices prevailing at the times the entries, withdrawals or recurrent losses take place. This is exactly the same method as that used to value changes in inventories of goods produced as outputs from the production process. Thus, the earlier discussion of the properties and behaviour of the PIM applies, mutatis mutandis, to inventories of inputs.

• 6.152. When goods or services produced within the same establishment are fed back as inputs into the production within the same establishment, they are not recorded as part of the intermediate consumption or the output of that establishment. On the other hand, deliveries of goods and services between different establishments belonging to the same enterprise are recorded as outputs by the producing establishments and must, therefore, be recorded as intermediate inputs by the receiving establishments.

3. The boundary between intermediate consumption and compensation of employees

• 6.153. Certain goods and services used by enterprises do not enter directly into the process of production itself but are consumed by employees working on that process. In such cases it is necessary to decide whether the goods and services are intermediate consumption or, alternatively, remuneration in kind to employees. In general, when the goods or services are used by employees in their own time and at their own discretion for the direct satisfaction of their needs or wants, they constitute remuneration in kind. However, when employees are obliged to use the goods or services in order to enable them to carry out their work, they constitute intermediate consumption.

• 6.154. It is immaterial to the employer whether they are treated as intermediate consumption or compensation of employees—they are both costs from the employer’s viewpoint—and the net operating surplus is the same. However, reclassifying such goods and services from remuneration in kind to intermediate consumption, or vice versa, changes value added and balance of primary incomes, and hence GDP as a whole.

• 6.155. The following types of goods and services provided to employees must be treated as part of intermediate consumption.

  • (a) Tools or equipment used exclusively, or mainly, at work;

  • (b) Clothing or footwear of a kind which ordinary consumers do not choose to purchase or wear and which are worn exclusively, or mainly, at work; e.g., protective clothing, overalls or uniforms. However, uniforms or other special clothing which employees choose to wear extensively off-duty instead of ordinary clothing should be treated as remuneration in kind;

  • (c) Accommodation services at the place of work of a kind which cannot be used by the households to which the employees belong—barracks, cabins, dormitories, huts, etc.;

  • (d) Special meals or drinks necessitated by exceptional working conditions, or meals or drinks provided to servicemen or others while on active duty;

  • (e) Transportation and hotel services provided while the employee is travelling on business;

  • (f) Changing facilities, washrooms, showers, baths, etc. necessitated by the nature of the work;

  • (g) First aid facilities, medical examinations or other health checks required because of the nature of the work.

  Employees may sometimes be responsible for purchasing the kinds of goods or services listed above and be subsequently reimbursed in cash by the employer. Such cash reimbursements must be treated as intermediate expenditures by the employer and not as part of the employee’s wages and salaries.

• 6.156. The provision of other kinds of goods and services, such as meals, ordinary housing services, the services of vehicles or other durable consumer goods used extensively away from work, transportation to and from work, etc. should be treated as remuneration in kind, as explained more fully in chapter VII.

4. The boundary between intermediate consumption and gross fixed capital formation

• 6.157. Intermediate consumption measures the value of goods and services that are transformed or entirely used up in the course of production during the accounting period. It does not cover the costs of using fixed assets owned by the enterprise nor expenditures on the acquisition of fixed assets. The boundary between these kinds of expenditures and intermediate consumption is explained in more detail below.

5. Collective services

• 6.173. Collective services provided by government units are not included in the intermediate consumption of enterprises, even though enterprises benefit from the provision of transport facilities, security, etc. It would be impossible to identify those collective services that benefit enterprises rather than households and to allocate such services between individual enterprises. Some individual non-market goods or services may also be provided to market producers, such as free veterinary services to farmers. By convention they are not included in their intermediate consumption and they are not separated from collective services.

6. Social transfers

• 6.174. Expenditures by government or NPISHs on goods or services produced by market producers that are provided directly to households, individually or collectively without any further processing constitute final consumption expenditures by government or NPISHs and not intermediate consumption. The goods and services in question are one form of social transfers and enter into the actual consumption of households.

7. Services of business associations

• 6.175. Non-profit institutions in the form of business associations that exist to protect the interests of their members and are financed by them are market producers. The subscriptions paid by the businesses constitute payments for services rendered. These services are consumed as intermediate inputs by the members of the association and are valued by the amounts paid in subscriptions, contributions or dues.

8. The boundary between intermediate consumption and value added

• 6.176. The boundary between intermediate consumption and value added is not a rigid one fixed purely by the technology of production. It is also influenced by the way in which the production is organized and distributed between different establishments or enterprises.

• 6.177. The types of services produced by ancillary activities can either be produced for own use within the same establishment or obtained from outside, i.e., from specialist market enterprises. If an establishment obtains the services from outside instead of from ancillary activities, its value added is reduced and intermediate consumption increased, even though its principal activity remains completely unchanged. As ancillary activities themselves have intermediate inputs, however, the increase in intermediate consumption is likely to be less than the value of the additional services purchased. Nevertheless, the distribution of value added between establishments and enterprises is bound to be influenced by the extent to which the services of ancillary activities are produced in-house or obtained from outside. Similarly, observed input-output ratios may vary significantly for the same reason, even between equally efficient establishments utilizing the same technology for their principal activity.

• 6.178. The decision to rent, rather than purchase buildings, machinery or equipment, can also have a major impact on the ratio of intermediate consumption to value added and the distribution of value added between producers. Rentals paid on buildings or on machinery or equipment under an operating lease constitute purchases of services that are recorded as intermediate consumption. However, if an enterprise owns its buildings, machinery and equipment, most of the costs associated with their use are not recorded under intermediate consumption. The capital consumption on the fixed assets forms part of gross value added while interest costs, both actual and implicit, have to be met out of the net operating surplus. Only the costs of the materials needed for maintenance and repairs appear under intermediate consumption. Decisions to rent rather than purchase may be influenced by factors quite unrelated to the technology of production, such as taxation, the availability of finance, or the consequences for the balance sheet.

1. Introduction

• 6.179. Consumption of fixed capital is a cost of production. It may be defined in general terms as the decline, during the course of the accounting period, in the current value of the stock of fixed assets owned and used by a producer as a result of physical deterioration, normal obsolescence or normal accidental damage. It excludes the value of fixed assets destroyed by acts of war or exceptional events such as major natural disasters which occur very infrequently. Such losses are recorded in the System in the account for “Other changes in the volume of assets”. Consumption of fixed capital is defined in the System in a way that is intended to be theoretically appropriate and relevant for purposes of economic analysis. Its value may deviate considerably from depreciation as recorded in business accounts or as allowed for taxation purposes, especially when there is inflation.

• 6.180. Fixed assets may have been purchased in the past at times when both relative prices and the general price level were very different from prices in the current period. In order to be consistent with the other entries in the same production account, consumption of fixed capital must be valued with reference to the same overall set of current prices as that used to value output and intermediate consumption. Consumption of fixed capital should reflect underlying resource costs and relative demands at the time the production takes place. It should therefore be calculated using the actual or estimated prices and rentals of fixed assets prevailing at that time and not at the times the goods were originally acquired. The “historic costs” of fixed assets, i.e., the prices originally paid for them, may become quite irrelevant for the calculation of consumption of fixed capital if prices change sufficiently over time.

2. Consumption of fixed capital and rentals on fixed assets

• 6.181. The rental is the amount payable by the user of a fixed asset to its owner, under an operating lease or similar contract, for the right to use that asset in production for a specified period of time. The rental needs to be large enough to cover not only the reduction in the value of the asset over that period—i.e., the consumption of fixed capital—but also the interest costs on the value of the asset at the start of the period and any other costs incurred by the owner. The interest costs may consist either of actual interest paid on borrowed funds or the loss of interest incurred as a result of investing own funds in the purchase of the fixed asset instead of a financial asset. Whether owned or rented, the full cost of using the fixed asset in production is measured by the actual or imputed rental on the asset and not by consumption of fixed capital alone. When the asset is actually rented under an operating lease or similar contract, the rental is recorded under intermediate consumption as the purchase of a service produced by the lessor. When the user and the owner are one and the same unit, consumption of fixed capital represents only part of the cost of using the asset.

• 6.182. The value of a fixed asset to its owner at any point of time is determined by the present value of the future rentals (i.e., the sum of the discounted values of the stream of future rentals) that can be expected over its remaining service life. Consumption of fixed capita] is therefore measured by the decrease, between the beginning and the end of the current accounting period, in the present value of the remaining sequence of rentals. The extent of the decrease will be influenced not only by the amount by which the efficiency of the asset may have declined during the current period but also by the shortening of its service life and the rate at which its economic efficiency declines over its remaining service life. The flow of future rentals which determine the present values used to derive consumption of fixed capital must, of course, be valued at current prices or rentals.

• 6.183. The calculation of consumption of fixed capital is a forwardlooking measure that is determined by future, and not past, events. The future rentals on which its value depend themselves depend upon the benefits which institutional units expect to derive in the future from using the asset in production over the remainder of its service life. Unlike depreciation as usually calculated in business accounts, consumption of fixed capital is not, at least in principle, a method of allocating the costs of past expenditures on fixed assets over subsequent accounting periods. The value of a fixed asset at a given moment in time depends only on the remaining benefits to be derived from its use, and consumption of fixed capital must be based on values calculated in this way.

3. The calculation of consumption of fixed capital

• 6.184. Depreciation as recorded in business accounts may not provide the right kind of information for the calculation of consumption of fixed capital, for the reasons given above. If data on depreciation are used, they must, at the very least, be adjusted from historic costs to current prices. However, depreciation allowances for tax purposes have often been grossly manipulated in quite arbitrary ways to try to influence rates of investment and are best ignored altogether in many cases. It is therefore recommended that independent estimates of consumption of fixed capital should be compiled in conjunction with estimates of the capital stock. These can be built up from data on gross fixed capital formation in the past combined with estimates of the rates at which the efficiency of fixed assets decline over their service lives. As a result of market forces, the purchaser’s price of a new fixed asset should provide a good initial estimate of the present value of the future rentals which can be derived from it. Subsequent changes in its value can then be deduced analytically from information or assumptions about the rate at which its efficiency in production declines overtime. This method of building up estimates of the capital stock and changes in the capital stock over time is known as the perpetual inventory method, or PIM. Estimates of consumption of fixed capital are obtained as a byproduct of the PIM.

4. The coverage of consumption of fixed capital

• 6.185. Capital consumption is calculated for all fixed assets—that is, tangible and intangible fixed assets—owned by producers, but not for valuables (precious metals, precious stones, etc.) that are acquired precisely because their value, in real terms, is not expected to decline over time. Fixed assets must themselves have been produced as outputs from processes of production as defined in the System. Consumption of fixed capital does not, therefore, cover the depletion or degradation of non-produced assets such as land, mineral or other deposits, or coal, oil, or natural gas.

• 6.186. Capital consumption must, however, be calculated in respect of fixed assets which are constructed to improve land, such as drainage systems, dykes, or breakwaters or on assets which are constructed on or through land—roads, railway tracks, tunnels, dams, etc. Although some structures such as roads or railway tracks may appear to have infinite lives if properly maintained, it must be remembered that the value of assets may decline not merely because they deteriorate physically but because of a decrease in the demand for their services as a result of technical progress and the appearance of new substitutes for them. In practice, many structures, including roads and railway tracks, are scrapped or demolished because they have become obsolete. Even though the estimated service lives may be very long for some structures, such as roads, bridges, dams, etc., they cannot be assumed to be infinite. Thus, capital consumption needs to be calculated for all types of structures, including those owned and maintained by government units, as well as machinery and equipment.

• 6.187. Losses of fixed assets due to normal accidental damage are also included under consumption of fixed capital; that is, damage caused to assets used in production resulting from their exposure to the risk of fires, storms, accidents due to human errors, etc. When these kinds of accidents occur with predictable regularity they are taken into account in calculating the average service lives of the goods in question. At the level of the economy as a whole, the actual normal accidental damage within a given accounting period may be expected to be equal, or close, to the average. However, for an individual unit, or group of units, any difference between the average and the actual normal accidental damage within a given period is recorded in the other changes in volume of assets account. On the other hand, losses due to war or to major natural disasters which occur very infrequently—major earthquakes, volcanic eruptions, tidal waves, exceptionally severe hurricanes, etc.—are not included under consumption of fixed capital. There is no reason for such losses to be charged in the production account as costs of production. The values of the assets lost in these ways are recorded in the other changes in volume of assets account. Similarly, although consumption of fixed capital includes reductions in the value of fixed assets resulting from normal, expected rates of obsolescence, it should not include losses due to unexpected technological developments that may significantly shorten the service lives of a group of existing fixed assets. Such losses are treated in the same way as losses due to above average rates of normal accidental damage. In practice, however, it may be difficult to measure such losses.

5. The perpetual inventory method

• 6.188. A brief explanation of how consumption of fixed capital may be calculated as a by-product of the perpetual inventory method of calculating the capital stock is given in this section.

6. “Gross” and “net” recording

• 6.201. The consumption of fixed capital is one of the most important elements in the System. In most cases, when a distinction is drawn between “gross” and “net” recording “gross” means without deducting consumption of fixed capital while recording “net” means after deducting consumption of fixed capital. In particular, all the major balancing items in the accounts from value added through to saving may be recorded gross or net: i.e., before or after deducting consumption of fixed capital. It should also be noted that consumption of fixed capital is typically quite large compared with most of the net balancing items. It may account for 10 per cent or more of total GDP.

• 6.202. It is clear from the previous sections that the consumption of fixed capital is one of the most difficult items in the accounts to measure and estimate. The depreciation figures recorded in business accounts, or allowed for tax purposes, may be very difficult to adjust to bring them into line with consumption of fixed capital as understood in economic theory and defined in the System, while it may not be possible to estimate consumption of fixed capital using the perpetual inventory method if long time series of gross fixed capital formation are not available in some detail. Moreover, consumption of fixed capital does not represent the aggregate value of a set of transactions. It is an imputed value whose economic significance is different from entries in the accounts based mainly on market transactions.

• 6.203. For these reasons, the major balancing items in national accounts have always tended to be recorded both gross and net of consumption of fixed capital. This tradition is continued in the System where provision is also made for balancing items from value added through to saving to be recorded both ways. In general, the gross figure is obviously the easier to estimate and may, therefore, be more reliable, but the net figure is usually the one that is conceptually more appropriate and relevant for analytical purposes.

1. Introduction

• 6.204. More than one set of prices may be used to value outputs and inputs depending upon how taxes and subsidies on products, and also transport charges, are recorded. Moreover, value added taxes, (VAT), and similar deductible taxes may also be recorded in more than one way. The methods of valuation used in the System are explained in this section.

2. Basic and producers’ prices

• 6.205. The System utilizes two kinds of output prices, namely, basic prices and producers’ prices:

  • (a) The basic price is the amount receivable by the producer from the purchaser for a unit of a good or service produced as output minus any tax payable, and plus any subsidy receivable, on that unit as a consequence of its production or sale. It excludes any transport charges invoiced separately by the producer;

  • (b) The producer’s price is the amount receivable by the producer from the purchaser for a unit of a good or service produced as output minus any VAT, or similar deductible tax, invoiced to the purchaser. It excludes any transport charges invoiced separately by the producer.

  The amounts charged by non-market producers when they sell output at prices that are not economically significant do not constitute basic or producers’ prices as just defined. Prices that are not economically significant are not used to value the output sold at such prices: instead, such output is valued by its costs of production (see paragraph 6.220). Neither the producer’s nor the basic price includes any amounts receivable in respect of VAT, or similar deductible tax, invoiced on the output sold. The difference between the two is that to obtain the basic price any other tax payable per unit of output is deducted from the producer’s price while any subsidy receivable per unit of output is added. Both producers’ and basic prices are actual transaction prices which can be directly observed and recorded. Basic prices are often reported in statistical inquiries and some official “producer price” indices actually refer to basic prices rather than to producers’ prices as defined here. When output produced for own final consumption, or own gross fixed capital formation, is valued at basic prices, it is valued at the estimated basic prices that would be receivable by the producer if the output were to be sold on the market.

• 6.206. When output is recorded at basic prices, any tax on the product actually payable on the output is treated as if it were paid by the purchaser directly to the government instead of being an integral part of the price paid to the producer. Conversely, any subsidy on the product is treated as if it were received directly by the purchaser and not the producer. The basic price measures the amount retained by the producer and is, therefore, the price most relevant for the producer’s decision-taking. It is becoming increasingly common in many countries for producers to itemize taxes separately on their invoices so that purchasers are informed about how much they are paying to the producer and how much as taxes to the government.

3. Purchasers’ prices

• 6.215. The purchaser’s price is the amount paid by the purchaser, excluding any deductible VAT or similar deductible tax, in order to take delivery of a unit of a good or service at the time and place required by the purchaser. The purchaser’s price of a good includes any transport charges paid separately by the purchaser to take delivery at the required time and place.

• 6.216. When comparing the purchaser’s price with the producer’s or basic price, it is important to specify whether they refer to the same transaction or two different transactions. For certain purposes, including input-output analysis, it may be convenient to compare the price paid by the final purchaser of a good after it has passed through the wholesale and retail distribution chains with the producer’s price received by its original producer. In this case the prices refer to two different transactions taking place at quite different times and locations: they must differ at least by the amount of the wholesale and retail trade margins.

• 6.217. When the prices refer to the same transaction, that is, the purchaser buys directly from the producer, the purchaser’s price may exceed the producer’s price by:

  • (a) The value of any non-deductible VAT, payable by the purchaser; and

  • (b) The value of any transport charges on a good paid separately by the purchaser and not included in the producer’s price.

  It follows that the purchaser’s price may exceed the basic price by the amount of the two items just listed plus the value of any taxes less subsidies on the product (other than VAT).

1. Output

• 6.218. Goods and services produced for sale on the market at economically significant prices may be valued either at basic prices or at producer’s prices. The preferred method of valuation is at basic prices, especially when a system of VAT, or similar deductible tax, is in operation, although producer’s prices may be used when valuation at basic prices is not feasible.

• 6.219. Output produced for own final use should be valued at the average basic prices of the same goods or services sold on the market, provided they are sold in sufficient quantities to enable reliable estimates to be made of those average prices. If not, such non-market output should be valued by the total production costs incurred, including consumption of fixed capital and any taxes (less subsidies) on production other than taxes or subsidies on products. The non-market output produced by government units and NPIs and supplied free, or at prices that are not economically significant, to other institutional units or the community as a whole is valued by total production costs, including consumption of fixed capital and taxes (less subsidies) on production other than taxes or subsidies on products.

2. Intermediate consumption

• 6.220. Expenditures by enterprises on goods or services intended to be used for intermediate consumption should be valued at purchasers’ prices. Intermediate inputs obtained from other establishments belonging to the same enterprise should be valued at the same prices as were used to value them as outputs of those establishments plus any additional transport charges not included in the output values.

• 6.221. In the absence of VAT or similar deductible taxes, the total value of the intermediate consumption of an enterprise is the same whether valued at purchasers’ prices or at producers’ or ex-customs prices, (see chapter XV for the definition of ex-customs prices). The use of producers’ or ex-custom prices implies that purchasers are treated as purchasing the services of wholesalers and retailers separately from the goods which pass through wholesale and retail distribution: they are also treated as purchasing goods and transportation services separately when they are invoiced or purchased separately. While the use of producers’ prices leads to a different allocation of expenditures from the use of purchasers’ prices, it does not change the total value of the expenditures. However, when a system of VAT or similar taxes is in operation, expenditures by enterprises on goods or services intended for intermediate use may include small amounts of non-deductible VAT which are excluded from the producers’ prices.

1. Introduction

• 6.222. Value added is the balancing item in the production account for an institutional unit or sector, or establishment or industry. It measures the value created by production and may be calculated either before or after deducting the consumption of fixed capital on the fixed assets used. As stated above:

  • (a) Gross value added is defined as the value of output less the value of intermediate consumption;

  • (b) Net value added is defined as the value of output less the values of both intermediate consumption and consumption of fixed capital.

  To avoid repetition, only gross value added will be cited in the following sections when the corresponding conclusions for net value added are obvious.

• 6.223. Gross value added is an unduplicated measure of output in which the values of the goods and services used as intermediate inputs are eliminated from the value of output. The production process itself can be described by a vector of the quantities of goods and services consumed or produced in which inputs carry a negative sign. By associating a price vector with this quantity vector, gross value added is obtained as the inner product of the two vectors.

  • Let q = the vector of quantities consumed or produced

    p = the vector of prices

    Then

    gross value added = p˙q

  Alternative measures of gross value added may be obtained by combining different price vectors with a single quantity vector. For example, gross value added may be measured using the prices of some other time period or some other country. However, the price and quantity vectors are not independent of each other. The technology used—i.e., the particular production process selected—is itself influenced by the relative input and output prices confronting the producer. The quantities therefore depend on the prices. A process which is economically efficient and profitable at one set of prices may cease to be so at another and would, therefore, not be used at those prices. For this reason, figures of gross value added obtained by revaluing the quantities at very different sets of relative prices may have little economic significance and may even become negative.

• 6.224. From an accounting point of view, gross value added is essentially a balancing item. As such, it is not an independent entity. It is defined in the context of a production account, being a function of all the other entries in the account. There is no actual set of goods or services that can be identified with the gross value added of an individual producer, sector or industry. Gross value added is not measured as the sum of any specific set of transactions. As a balancing item it lacks dimensions in the sense that it has no quantity units of its own in which it can be measured, and hence also no prices of its own.

2. Alternative measures of value added

• 6.225. As indicated above, alternative measures of gross value added may be obtained by associating different price vectors with a given vector of input and output quantities. The various mea sures which may be derived using the different sets of prices recognized in the System are considered below.

M. The main aggregates associated with value added