Output Data Information

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In IMPLAN, Total Industry Output (TIO) is the value of production by industry in a calendar year.  It can also be described as annual revenues plus net inventory change.  The output for the wholesale and retail sectors represents the wholesale or retail margin only; it does not represent revenues (sales). 

National Industry Output

Output is, by necessity, estimated from a number of sources. With the exception of the farm sectors and the commercial fishing sector, for which there is state-level raw data, raw TIO data are only available at the national level.  IMPLAN Output data largely come from the same sources as those used by the BEA in developing their Benchmark I-O tables.  The raw data source for the construction sectors and most service sectors is the BEA’s Industry Output Series.  The raw data source for most manufacturing sectors is the U.S. Census Bureau’s Annual Survey of Manufactures (ASM).  Both of these data sources are on a national basis and are lagged one year relative to the IMPLAN data year.  These data are projected based on the change in employment and employee compensation from the previous year to the current data year. While the BEA Industry Output Series data  for detailed sectors is lagged one year relative to the IMPLAN data year, the same data source has a non-lagged series at a more aggregate sectoring level, to which we control our projected values for the more detailed sectors.  Redefinition adjustments are also applied to output estimates in accordance with BEA practices.  Some special sectors require information from other surveys and censuses, as described below. 

Farm Sectors

We get state-level output estimates for the farm sectors from the USDA’s NASS Value of Production and ERS Cash Receipts data series. These state values are then distributed to the counties by using the ratio of county physical production to state physical production from the latest Census of Agriculture.  Please see this document for more details.

Extraction of Natural Gas and Crude Petroleum and Extraction of Natural Gas Liquids

We use a combination of BEA Output Series data, Economic Census data, and physical production and prices data from the U.S. Energy Information Administration (EIA) for petroleum and natural gas. While the EIA data are current and have the necessary sector detail, they are on a commodity basis, whereas the BEA data (which are lagged a year and have less sector detail) are industry-based, which is what IMPLAN needs. Thus, we first use the ratio of “Extraction of natural gas and crude petroleum” output to “Extraction of natural gas liquids” output from the latest Economic Census (which only comes out every 5 years) to split out the lagged BEA value into the two IMPLAN sectors. We then project the two BEA figures using the EIA data.

 

Retail

The BEA Industry Output series has a limited number of retail sectors. Therefore, we apply the margin-to-sales ratio, calculated using data from the U.S. Census Bureau’s Annual Retail Trade Survey which is lagged one year, to current year sales data from the U.S. Census Bureau’s monthly time-series data for retail sales to get an estimate of current year retail margin. Note that the output for the wholesale and retail sectors represents the wholesale or retail margin only; it does not represent revenues (sales). 

Other Sectors

National output for the owner-occupied housing and tenant-occupied housing sectors is set to the Personal Consumption Expenditure (Household Final Demands) values for owner-occupied housing and tenant-occupied housing from BEA NIPA Table 2.4.5. – Personal Consumption Expenditures by Type of Product.

State-level output for the commercial fishing sector comes from the NOAA Fisheries Office of Science & Technology, Fisheries Statistics DivisionOAA Fisheries Office of Science & Technology, Fisheries Statistics Division.

Sectors 527 through 530 (Used and second-hand goods, Scrap, Rest of world adjustment, and Non-comparable imports, respectively) are commodities only; therefore, their TIO is zero.

Sectors 531-536 are government payroll sectors and whose TIO, by definition, is equal to Value-Added.

State and County Distribution of National TIO

For the farm sectors and the commercial fishing sector, state-level TIO data are available.  County data are a function of state output per worker ratios applied to county employment figures.  For the remaining sectors, the first estimate of TIO is calculated as Intermediate Expenditures (IE) plus Value-Added (VA), where IE is based on U.S. IE-to-Employment ratios.  State TIOs are forced to sum to U.S. TIO, and county TIOs are forced to sum to state TIOs.

Measures of GDP: Value Added and Final Demand

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GDP Defined

GDP is defined as the total market value of all final goods and services produced within a region in a given period of time (usually a quarter or year). GDP is the sum of value added at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time. In other words, GDP is the wealth created by industry activity. In a social accounting matrix (SAM) model such as IMPLAN, this is the sum of value added. Furthermore, in a balanced SAM model, total value-added = total final demand.

Note that GDP is only concerned with new and domestic production; therefore, it excludes the value of used goods and output produced in another country that is owned by domestic factors of production (including the latter yields Gross National Product). Note also that not all productive activity is included in GDP. For example, unpaid work (such as that performed in the home or by volunteers) and black-market activities are not included because they are difficult to measure and value accurately. That means, for example, that a baker who produces a loaf of bread for a customer would contribute to GDP, but would not contribute to GDP if he baked the same loaf for his family (although the ingredients he purchased would be counted).1 GDP takes no account of the wear and tear on the machinery, buildings, etc. (i.e., capital stock) that are used in producing the output. If this depletion of the capital stock, called depreciation, is subtracted from GDP we get net domestic product.1

Furthermore, GDP is not a measure of the overall standard of living or well-being of a country. Although changes in the output of goods and services per person (GDP per capita) are often used as a measure of whether the average citizen in a country is better or worse off, it does not capture things that may be deemed important to general well-being. So, for example, increased output may come at the cost of environmental damage or other external costs such as noise. Or it might involve the reduction of leisure time or the depletion of nonrenewable natural resources. The quality of life may also depend on the distribution of GDP among the residents of a country, not just the overall level.1

Measuring GDP

Theoretically, GDP can be measured in three different ways: the production method, the income method, and expenditure method. Conceptually, all of these measurements are tracking the exact same thing. Some differences can arise based on data sources, timing and mathematical techniques used.

Production Method

The production approach sums the “value-added” at each stage of production, where value-added is defined as total output (also known as value of production)2 less the value of intermediate inputs into the production process. This can be calculated either by subtracting input costs from the final output of each industry or by summing each industry’s payments made to the factors of production.3

National Income Method

The income approach sums the incomes generated by production, which includes the following:

  1. Compensation of employees (wages, salaries, benefits, etc)
  2. Proprietor income (sole proprietorship and unicorporated business income
  3. Rental income (property-owner income)
  4. Corporate profits
  5. Net interest (paid by business)
  6. Taxes on production and imports (sales tax, property tax, custom duties, and other taxes and fees) less government subsidies
  7. Net business transfer payments (net payments by businesses to persons, government, and the rest of the world for which no current services are performed
  8. Surplus of government enterprises

National Expenditure Method

The expenditure approach is the most widely-used approach to measure GDP. This approach adds up the value of purchases made by final users. Final demand expenditures consist of:

  1. Personal consumption expenditures: spending by households on non-fixed-capital items.
  2. General government final consumption: spending by governments on non-fixed-capital items, excluding transfer payments.4
  3. Gross domestic fixed capital formation: the value of houses and other durables formed during the year plus increases in stocks and works in progress (i.e., net additions to inventory).
  4. Net Exports: exports represent items that are produced in the country and sold to purchasers outside the country. In the same way, imports are subtracted from the calculation.
  5. From this sum, institutional sales must be subtracted since they are accounted for elsewhere in GDP. For example, a government institution5 might provide hospital services to a household. Government then has extra income and extra spending (e.g., buying more stethoscopes). The sale/purchase of hospital services cannot increase both personal consumption expenditures and government final consumption.

Relationship between GDP and Final Demand

In general macroeconomic terms, both GDP and Final Demand (FD) share the same equation: GDP or FD = total consumption spending (C) + gross private investments (I)6 + total government expenditures (G) + net exports (X-M). In compact form:

[1]   FD = C + I + G + (X-M)

Note that total output by industry (O) is the sum of output going to final demand (e.g., production of vegetables that households consume), plus output that serves other industries, also known as intermediate expenditures (IE) (e.g., vegetables that food manufacturing sectors buy as one of their inputs into the production of other food products). So, we now have another equation in compact form:

[2]   O = FD + IE

As mentioned above, output can be measured as the sum of value added and intermediate expenditures. One could ask each business how much raw materials and services they purchased, how much did they pay employees, how much did they pay in taxes, and how much was left over as profit. This gives a third equation:

[3]   O = IE + VA

Note that VA consists of labor income (LI), other property income (OPI), and taxes on production and imports net of subsidies (TOPI):

[4]   VA = LI + OPI + TOPI

If we substitute the right-hand side of equation [3] into the left-hand side of equation [2], we get the following:

IE + VA = FD + IE.

In this case, IE cancels on both sides, and we are left with VA = FD, which demonstrates the equality of Value Added and Final Demand. Thus, it is true that final demand equals value added. This equality can be envisioned graphically in a SAM as well. The row sum for an industry equals the column sum for that same industry. Each transaction where industries intersect is a component of IE. Other than IE, each industry’s row has only FD leftover. Similarly, other than IE, each industry’s column has only VA left over. Since output measured by rows equaled output measured by column to begin with, it is necessarily the case that FD = VA.

One can also use equations [1] and [4] to relate the components of FD and VA as follows:

C + G + I + X – M = LI + OPI + TOPI.

 

1http://www.imf.org/external/pubs/ft/fandd/basics/gdp.htm

2Value of production = sales + net inventory change + on-site use (e.g., on-farm consumption)

3In IMPLAN, the factors of production are Employee Compensation, Proprietor Income, Other Property Income (largely corporate profits), Taxes on Production and Imports less Subsidies.

4Transfer payments include Social Security, Medicare, unemployment insurance, welfare programs, and subsidies.

5Government institutions represent administrative government and are distinct from government enterprises in that the latter cover a significant portion of their operating expenses through sales (for example, public transportation services cover a large portion of their operating costs through ticket sales).

6Savings and investment are the same thing in accounting. Savings are defined as the money left in the business after all costs and profits have been paid/distributed. If these savings are not invested in something concrete, it can still be considered an investment in cash.

Output, Value Added, & Double-Counting

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INTRODUCTION:

Gross Output and Gross Domestic Product (GDP) are both highly useful economic statistics that are published as part of the BEA’s industry accounts. 

OUTPUT

Output is the value of an industry’s production.  It can be measured in two ways: from the sales (income) perspective or the expenditures (spending) perspective.

  1. From the sales (income) perspective, Output is the sum of sales to final users in the economy (GDP) + sales to other industries (intermediate inputs) + inventory change.  
  2. From the expenditures perspective, Output is the sum of an industry’s Value Added + intermediate inputs.

VALUE ADDED

Value Added is defined as the total market value of all final goods and services produced within a region in a given period of time (usually a quarter or year).  It is the sum of the intermediate stages of production. It is the sum of all added value at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time.  In other words, it is the wealth created by industry activity (1).

Value Added in a Social Accounting Matrix (SAM) model such as IMPLAN, is equal to Gross Domestic Product (GDP). In a balanced SAM model, total Value Added = total Final Demand.  

COMPARING OUTPUT & VALUE ADDED:

OUTPUT VS. VALUE ADDED 

Output is simply a measure of the total value of all goods produced. Value Added is a subset of Output and is a useful measure of wealth created by an economy.  An industry buys goods and services from other industries and remanufactures those goods and services to create a product of greater value (Output) than the sum of the goods that goes into its product (Intermediate Expenditures). That increase in value is the value that the producer adds to the inputs as a result of the production process.  This added value is then used to pay labor and taxes with hopefully some remainder for profit.

DOES OUTPUT DOUBLE-COUNT?

Analysts sometimes focus on Output because it is bigger than Value Added.  However, because the Output of an industry requires Output from other industries, it double-counts if one attempts to use it as a measure of aggregate production.  

For example, suppose an entrepreneur named Doug sets up a shop called “Doug’s Computer Service” to install an operating system onto customers’ computers, as well as give some instruction on how to use it.  For this service he charges $100. If he services 100 customers:

     Revenue (Output) = $10,000

     Shop costs (electricity, rent, etc.) = $2,000

     Value Added = $8,000 (from this he pays property taxes, production taxes, and has a net
     profit) 

Based on the needs of his customers, Doug decides that he will order the computer for them and turn over a complete product.  The computer costs him $950 and he will tack on $50 for the additional hassle of buying the computer. Thus, for each unit the customer now pays $1,100 ($1,000 for the computer plus $100 for the service).  This time, if he services 100 customers: 

     Revenue (Output) = $110,000

     Computer costs = $95,000

     Other shop costs = $2,000

     Value Added = $13,000

Doug’s Output has gone up 1,000% but Value Added only grew by 63% (his costs increased by 4,750%).  His firm’s huge increase in Output would be very misleading as an indicator of how the local economy is doing.  If the computer is manufactured locally, then the manufacturer’s Output will show up as an Indirect Effect, which will double count its contribution to the economy if it is also included in Doug’s firm’s overall Direct Output Effect.  Thus, while Output is an essential statistical tool needed to study and understand the interrelationships of the industries that underlie the overall economy, because of its duplicative nature it may not be a good stand-alone indicator of the overall health or contribution of an industry or sector (2).

 

Written July 12, 2019

1. Note, however, that GDP misses some aspects of a region’s economic performance.  See this article for more: http://www.foreignaffairs.com/articles/140790/diane-coyle/beyond-gdp

2. For more, see: http://www.bea.gov/faq/index.cfm?faq_id=1034&searchQuery#sthash.U1eMBclU.dpuf

The Output Equation

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INTRODUCTION:

IMPLAN defines the total annual production value of each Sector or Commodity as Output. Output is in producer prices and includes net of inventory changes. To understand how definition of Output creates some nuances in certain Sectors, read the full definition of Output here.

Since Output is the total production value of a Sector, it include all components of production value or Output for a given Sector: 

Output = Employee Compensation + Proprietor Income + Intermediate Expenditures + Tax on Production and Imports + Other Property Income

This formula is referred to as the Output Equation.

DETAILS:

Output_diagram.png

The components of Output can be summarized as: 

Output = Value Added + Intermediate Expenditures 

Because, as shown above, all components of Output are included in Value Added except for Intermediate Expenditures.

Another way to look at the Output Equation is: 

Output = Labor Income + Taxes on Production and Imports + Other Property Income + Intermediate Expenditures 

Labor Income includes Employee Compensation and Proprietor Income.

Therefore when reporting data in Region Details > Industry Summary or in your IMPLAN Results never sum together Labor Income, Value Added, or Output. If you were to sum these three values, you’d counting Value Added twice and Labor Income three times! 

When reporting the value of entire economy or an entire impact keep in mind some key considerations around why reporting Value Added may be appropriate found in Output, Value Added, & Double-Counting.

The components of Output can be defined as: 

Intermediate Expenditures  are purchases of non-durable goods and services such as energy, materials, and purchased services that are used for the production of other goods and services rather than for final consumption. These inputs are sometimes referred to as current-account expenditures. They do not include any capital-account purchases nor do they include the inputs from the primary factors of production (capital and labor) that are components of value added. (BEA)

Employee Compensation is the total payroll cost of the wage and salary employees to the employer.  This includes wages and salaries, all benefits (e.g., health, retirement) and payroll taxes (both sides of social security, unemployment insurance taxes, etc.).  Also referred to as fully-loaded payroll.

Proprietor Income consists of payments received by self-employed individuals and unincorporated business owners. This income also includes the capital consumption allowance and is recorded on Federal Tax form 1040C. More info here.

Taxes on Production and Imports includes sales and excise taxes, customs duties, property taxes, motor vehicle licenses, severance taxes, other taxes, and special assessments.  

Because TOPI is net of subsidies, it can be negative for a given Industry in a given year if that industry received more subsidies from the government than it paid out in these specific taxes in that year. 

Note: TOPI does not include all taxes paid by an industry.  For example, social insurance taxes are a part of Employee Compensation, and profits taxes are part of Other Property Income. 

Other Property Income represents gross operating surplus minus proprietor income. OPI includes consumption of fixed capital (CFC), corporate profits, business current transfer payments (net), and income derived from dividends, royalties, corporate profits, and interest income.

Deflators

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What are deflators and when are they used in IMPLAN?

The purchasing power of a dollar changes over time (typically decreasing) due to inflation, a cyclical phenomenon by which prices of goods and services increase[1], which spurs workers to demand higher wages, which in turn increases demand for goods and services, thereby spurring additional price increases, and so on.  Due to inflation, a dollar in 2017 cannot purchase as much as did a dollar in 2001, for example; as such, a 2017 dollar is not the same thing as a 2001 dollar.  IMPLAN’s deflators are indexes of inflation, with the deflator for the model data year set at 1.00. 

The deflators are not used to create the social accounts or multipliers but are necessary for impact analysis whenever the dollar year of the event differs from the year of the model data.  The same model year multipliers are used regardless of the dollar year of the event; it is the value applied to those multipliers that changes when the dollar year of the event differs from the year of the model data.  Indeed, if one were to run an un-customized event using an event year that differs from the model year but views the results in the same year as the model, the multipliers calculated from these results will match the multipliers displayed in the multipliers tables of the model.

Why is this adjustment needed?

All the relationships in the multipliers are based on model year prices, so the direct effects applied to those multipliers need to also be in model year dollars – this is accomplished via the deflators.  The value applied to the multipliers is the user-entered value divided by the deflator.  The deflators also allow impact results to be viewed in years other than the model year, regardless of whether or not the dollar year of the event differs from the year of the model data. 

While the event values and/or result values can be inflated or deflated, depending on whether the index value being applied is less than 1.00 or greater than 1.00 (i.e., depending on the industry/commodity and whether one is adjusting to a future or past value), we use a single term – deflators – to refer to all of these index values.

The output deflators are specific to the industry/commodity and are applied to the output value, while the same GDP deflators are the same for every industry/commodity and are applied to all of the value-added components.

Source data

The Bureau of Economic Analysis (BEA) provides historical output deflators which we use for past to current years.  For projections into the future, we use the annual rate of change from the Bureau of Labor Statistics’ (BLS) employment growth model.  The BEA also has historical GDP deflators which we use for past to current years.  For projections into the future, we use the annual rate of change from the BLS employment growth model for “All Industries”. 

 

[1] Not all goods and services are inflationary every year.  For example, the prices of consumer electronics often decrease over time.  As another example, the prices of agricultural commodities rise and fall in response to many factors, including weather.