GDP BY PRODUCTION APPROACH A general introduction with

GDP BY PRODUCTION APPROACH A general introduction with emphasis on integrated economic data collection framework Viet Vu Consultant UN STATISTICS DIVISION 1

Content of presentation Ø Introduction ØA to production approach to GDP trategy for data collection for benchmark year Ø Data extrapolation by use of surveys on production and labour force

Introduction to production approach to GDP

What is GDP, conceptually? Ø GDP is the sum of value added. Ø Value added is the difference between gross output and intermediate consumption Ø Gross output is the value of goods and services receivable by producers. It is called gross output at basic prices. In this case, gross output: § does not including cost of delivery unless it is part of the sale price of products. § does not include taxes paid by customers but transferable to the government. § is the same as revenues or sales reported in business accounting. Ø Intermediate consumption is the cost of all goods and services used in producing the output. It excludes all nondeductible value added taxes.

Measurement of output (1) Output is a concept used in national accounting, not a concept used in business accounting. Ø To get information for compiling output, one needs to collect information business understand. Ø The common terms in business accounting are: Ø § Revenues/Sales: include sales of major products and other incidental revenues. § Cost of Sales/Cost of goods sold q Cost of goods bought for resale (in the same conditions as received) q Cost of sales § § Cost of materials Cost of services Cost of labor Other costs like depreciation

Measurement of output and inputs of goods (2) Ø Sales: must be converted to output as sales can come from inventories, and as output can entered inventories instead of being sold. Ø Cost of Sales: must be converted to cost of production as materials used in production can be obtained from inventories. This means that: § Purchases of materials: must be converted to use of materials. Ø Output of manufactured output = Sales + Change in inventory of finished and semi finished goods. Ø Intermediate consumption of materials = Purchases of materials – Change in inventory of materials.

Measurement of output of services (3) Services may be produced and delivered directly to purchasers for immediate use and therefore there is no delivery costs such as trade and transport margins. Ø In most cases, output of services is revenues/sales and normally called fees. Ø Exceptions: Ø § Output for distributive trade or trade margins= Sales - Cost of goods bought for resale. § Output of banking: Estimated fees on deposits + Estimated fees on loans/investment assets + other direct fees. § Output of insurance: Premiums + Adjusted Premium supplements – Adjusted claims.

PROCESS OF GOODS CIRCULATION ON THE MARKET Sphere where basic and producer prices apply Producers of goods Sphere where purchasers’ prices apply Transport and trade margins added Wholesalers and retailers basic values = value receivable • Plus taxes on products • Less subsidies on products • Equal: Producer prices Consumers: other Government producers and final users.

GDP defined operationally Value at basic prices + + + Output (Goods) at basic prices Trade margins Transport margins Taxes less subsidies on products Output of services at basic prices Total output of goods and services 0 0 + = value at purchaser prices paid by users Output at purchaser prices For total economy: 1. Output at purchasers prices = output at basic prices + taxes less subsidies on products. 2. GDP = Output at purchasers prices – Intermediate at purchasers prices. 3. GDP = Value added at basic prices + Taxes less subsidies on products

Value added For non-market activity • Net operating surplus is zero • VA can be calculated directly Gross output Total value of output of goods and services at basic prices Less Total intermediate consumption at purchasers’ prices (not including deductible VAT) = Gross Value Added Gross value added at basic prices Less Other taxes less subsidies on production Less Compensation of employees • Wages and salaries • Bonuses & allowances • Social insurance payable by employers Less Consumption of fixed capital (imputed on fixed assets Equal Net operating surplus GDP = Gross value added at basic prices + Taxes on products – Subsidies on products

Gross output and value added for non-market producers Ø Ø Value added for non-market producers are calculated directly, unlike that of market producers which is calculated as a residual. Operating surplus is assumed to be zero. Value added at basic prices= Compensation of employees + other taxes (less subsidies) on production + consumption of fixed capital. Gross output at basic prices = Intermediate consumption + value added at basic prices. Data: Administrative sources

Why value added should be measured by economic activity (ISIC)? Ø Ø ISIC is an international system of classification of economic activity on which national economic activity classification (NSIC) should be based. This basically means that NSIC can be reclassified into ISIC for international comparison purposes. Fact: It has been confirmed by many studies that value added and even intermediate consumption at the detailed levels as ratios of gross outputs are very stable in the short-run and quite stable in the long-run as technology reflected by those ratios take time to change. Consequence: Value added ratios are used to estimate value added given gross outputs. Procedure: surveys are carried out monthly, quarterly or annually to obtain gross outputs. Value added ratios are applied gross outputs to estimate value added.

Value added ratios are frequently used to extrapolate GDP in the short-run Monthly, quarterly surveys on output by ISIC VA ratios Vvvvvvgg. Va. VVvv. V of VVAVVVV Benchmark year Estimated quarterly value added =VA ratios x outputs of the quarter Quarterly Value added must be reconciled to annual value added Estimated annual value added =VA ratios x outputs of the year Annual surveys on output and also by value added by ISIC

Reliability of estimates Ø Estimates will be more reliable if value added ratios are available at detailed level because: § Production technology is different for different activity: Using only agricultural value added ratios are less reliable than using detailed valued ratios for specific crops, animal production, vegetation, etc. to estimate the components and sum them up. § The structure of a more aggregate grouping changes more quickly due to demand than due to production technology. Ø Estimates will be more reliable if value added ratios are frequently updated, either every year or at least every five years.

Alternative indicators for value added estimation Ø Ø Employment, preferably working hours collected through labor force survey: useful for household activities. Other physical indicators such as crop production, kwh of electricity, tons of petroleum produced, etc.

Data collection Ø Ø Though value added can be calculated more reliably by economic activity but data can only be collected from production units which have identifiable addresses and can respond to questionnaires. This will be the subject of the next part.

Introduction to integrated economic data collection strategy

Statistical units Ø Statistical units are the entities for which information is sought and for which statistics are ultimately compiled. These units can, in turn, be divided into observation units and analytical units. The statistical units in the International Standard Industrial Classification (ISIC) Rev. 4 comprise: § § enterprise; enterprise group; establishment; local unit; § kind-of-activity unit (KAU); § homogeneous unit of production. Observation units Analytical units

Statistical unit for surveys Ø Ø Establishments are statistical units that are observable, with addresses and therefore able subject to surveys. They can be: § an enterprise -cum -establishment: a legal unit located in one geographical area, engages in one type of economic activity and produces one type of product. § full-fledged establishment as a part of an enterprise : with identifiable activity and location and with full cost accounting § Local unit: a part of an enterprise but located in a separate geographical location from the main location with identifiable activity and with full cost accounting (a local unit identified as establishment). § a government unit : with accounts of costs, fixed assets. § a non-profit institution § a household: engages in production, like farming, manufacturing, operating shops from home or outside home.

Identification of statistical units One establishment corporation (=enterprise = legal unit) Production establishment, ISIC x Multi-establishment corporation Headquarter establishment (ISIC x 3) Production establishment, ISIC x 1 Production establishment, ISIC x 2 May or may not locate in the same geographical areas

Framework of market statistical units Universe of Establishment/enterprises List-frame segment (corporations) Large units Public sector Small units Non-list frame segment (households) With fixed premises Without fixed premises Private sector In business register Census and sample surveys Not in business register Household-based area sampling surveys

A strategy for data collection by enterprise survey Ø A listing of all large and probably medium corporations (legally Ø Large corporations: incorporated enterprises) is needed. Only information on employment, and probably sales on local units identified by ISIC are requested. Large: 250 employees and over, Medium: 50 -250 employees. § Census should cover all large corporations. Large is defined by UN International Recommendations for industrial Statistics as having at least 250 employees. § Annual and monthly surveys: All large corporations or a large sample should be covered. Ø Medium, small and micro corporations: § Census or annual and monthly surveys: only samples are needed. Sample size varies inversely by type of corporation size. § Small and micro corporations if not in the list frame may be treated as part of non-listed frames Ø Household unincorporated units (non-listed frame): § Identify household-based enterprises by area sampling § Sample surveying household-based enterprises

How agriculture statistics are collected: alternative (1) Ø Farm census: § A census is a complete count of farms and ranches. A very few country, where farms (organized as corporations) are less numerous, censuses on farm revenues and costs are carried out every 5 years. § For example, the US has had recent censuses on 1992, 1997, 2002, 2007. In 2007 it has 2. 2 millions farms. Ø Surveys: § Sample surveys of farms can be carried out annually/seasonally from prospective plantings to production incomes and output.

How agriculture statistics are collected: Alternative (2) Ø Census: For most countries with huge number of farms which are not incorporated, agriculture census focuses mainly on land use. § Crops: Census of land use Surveys on yield rates § Plantations (fruit trees, coconut trees, coffees, orchards, etc. ) • Similar to above and/or • Survey/reports of Corporations § Animal stocks Ø Ø Survey: yield rates by crop cutting are carried out for estimating output. Rural Household surveys on supplementary agricultural products in backyards.

Data for nonmarket units Statistical units for non-market activities are normally identical with administrative units for which administrative data are regularly required. Output may be estimated by using data provided in budget plans, corrected for historical and normal deviations between planned budgets and realized budgets. Data will be revised when realized budget data is available.

Establishment data by sector origins and ISIC Rev. 4 Agriculture, forestry and fishing Major products Supplementary products Corporation Household NPISH General s s government (state & nonstate) X X X Mining and quarrying Manufacturing X X Utility Construction Market services Non-market services X X X X

GDP and production shares of institutions in Vietnam, 1999 -2007 1999 2007 100% General Government 9% 8. 52% Financial corporations 2% 1. 81% 41% 30% 0% 0% 49% 59. 7% GDP Households Nonprofit institutions Nonfinancial corporations

Activities by Households, Shares of GDP, 1999 - 2007, Vietnam Total households Agriculture Forestry Fishery Mining & Quarrying Manufacturing Utility Construction Trade & auto repair Hotels, restaurants Transport, communication Finance, insurance Business services (mainly real estate) Education Health Culture, sports Personal services 1999 41% 20% 1% 3% 3% 2% 5% 1% 1% 3% 1% 2007 30% 13% 3% 5% 2% 1% 2% 2%

Thank You