Thursday, May 8, 2014

Value Added by Sector: The Output Approach

The discourse on national income usually focuses on the expenditure approach to measuring GDP with emphasis on changes in consumption expenditure, government expenditure on goods and services,  fixed capital formation and net exports.

GDP = C + I + G + (X – M)

The output approach looks at a measure of total output minus intermediate consumption to get a measure of value added.  The income approach looks at the beneficiaries of this value added which can be divided in the remuneration of employees (wages and employer social insurance contributions) and mixed income/operating surplus (self employed income, actual and imputed rents, trading profits of companies).  Both the output and income approach will also include the amount of product taxes less subsidies paid to the government sector.  There is a quick look at the three approaches by sector here.

The CSO have published a new dataset giving details of value added by 64 NACE categories estimated using the output approach.  It is the first time the CSO have produced added value data by these sub-categories and only 2010 data is currently available.  The following has the Top 21 sub-categories (each providing a Gross Value Added at Factor Cost of more than €2 billion).  Click to enlarge.

Value Added by Nace Rev 2 Top 21

The table also includes a column for employees.  This is only an approximation as it is taken from Census 2011 which was collected in March 2011 rather than for FY2010 for the output data and also because the NACE sector for around 100,000 employees in the Census was unstated.  But using Value Added and the Number of Employees we get a rough indication of Value Added per Employee.  Value Added is distributed between Gross Operating Surplus of enterprises (profits) and Remuneration of Employees (wages).

The largest contributor to Value Added in Ireland in 2010 was the pharmaceutical sector with €12.8 billion.  This was generated with just over 25,000 employees so most of the Added Value went to Gross Operating Surplus. 

Just fractionally lower are human health and social work activities also with €12.8 billion but requiring almost 200,000 employees to do so meaning most of the Added Value goes to Remuneration of Employees.  This is not surprisingly as €15,448 million of the output in this category is non-market.

It might be surprising given their recent performance to see financial services activities next in the table but the economic concepts of added value and operating surplus are not the same as accounting profits.  Balance-sheet or holding losses do have affect GDP.

Real estate activities are next but two-thirds of the output in this category is the imputed rent from owner-occupied dwellings.  This ensures comparability of GDP figures across countries with different home-ownership rates.

The sectors in the above table where foreign owned companies dominate (contribute more than 85 per cent of turnover) are 21, 26, 32.5 and 58-63.

Categories 58-63 are noteworthy.  These are essentially the software and communications sectors.  Total output in these sectors was €43.3 billion with an Added Value of €12.3 billion from 68,500 employees. The activities in this category (NACE J) are:

NACE Rev 2 J

From the first table it can be seen that the output in categories 62-63 is particularly high at €22.8 billion but that added value is ‘only’ €4.2 billion due to €18.5 billion of intermediate consumption, which is likely the result of large royalty payments for patents and affiliate management fees as imports.

Sectors 21 (manufacture of pharmaceuticals), 26 (manufacture of computer and electronic products)  of 58-63 (software and IT services) are dominated by foreign-owned firms and contributed around €27.5 billion of added value.  Once remuneration of wages is accounted for the remaining Gross Operating Surplus of the companies in these sectors explains much of the difference between GDP and GNP. 

None of this is remotely surprising but the real benefit of the new data will come as the CSO publish figures for later and subsequent years which can be used to track changes over time.

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