The measurement of output

19.40    By the SNA definition, output consists of those goods and services that are produced within an establishment (or plant) that become available for use outside establishment, plus any goods and services produced for own final use. This definition of output is equivalent to the gross output definition in the productivity measurement.

19.41    The gross output definition is preferred because it is a natural output concept and consistent with the traditional production theory which links output to primary as well as intermediate inputs.⁸¹ Hulten argues that gross output 'is the correct concept for measuring the structure of production'.⁸² 

19.42    To facilitate the comparisons of productivity performance across different industries, a value-added concept is developed in the productivity measurement. This definition is based on the assumption that the components of value added are separable from that of intermediate inputs. The assumption of value-added output at the industry level also implies a specific way that productivity growth affects the usages of primary and intermediate inputs.⁸³

19.43    At an aggregate level, the value-added concept is more appropriate as it needs to remove inter-industry transfers in aggregating industry outputs to derive the total output of the component industries. In this context, the aggregate value-added output definition does not contradict the gross output concept at the corresponding disaggregate level.

19.44    The implications of alternative output measures on the interpretation of MFP measures are discussed in paragraphs 19.25-19.26. 

19.45    There are three output measures in the ABS productivity statistics:

• industry gross output;
• industry value added; and
• aggregate value added.

19.46    Gross output refers to the value of goods and services produced in the accounting period, including production that remains incomplete at the end of that accounting period. While this definition is straightforward for goods-producing industries, some clarification of treatment is useful for service industries such as Transport, Postal and Warehousing, Wholesale Trade and Retail Trade:

• The gross output of transport services is measured by the amounts receivable for transporting goods or persons. That is, the transporting from one location to another is a process of production and is referred to as a transport margin that adds to the quality from the same good as it changes location;
• The activity of storage relates to the 're-transporting' of goods from one point in time to another (as opposed to locations in the instance of transport services).  So the increase in price due to storage reflects storage costs incurred as a production process;
• The main output of the wholesale and retail trade industries is the value of the service provided in selling goods (i.e. goods purchased and resold are not treated as part of intermediate consumption). The value of the service is equal to the trade margins realised on the goods sold.

19.47    The measurement of these services at basic prices is analogous to that for goods producing industries: output at basic prices is the value of the trade margins, including the value of any subsidies received, and excluding taxes on production of the service.

19.48    Much of the gross output of finance and insurance industry needs to be estimated indirectly. In the ASNA, FISIM is an output of banks, other depository corporations, central borrowing authorities and securitisers. For banks and other depository corporations it is the sum of the imputed service charges for both borrowers and depositors while, for central borrowing authorities and securitisers, it is the sum of the imputed service charge for borrowers. Similarly, the value of the insurance service charge, which forms part of the output of insurance and pension funds, is estimated indirectly from the total receivables and payables of insurance enterprises, including the income accruing from the investment of technical reserves.

19.49    Intermediate inputs are the value of goods and services consumed as inputs into the production process. These goods and services may be transformed or completely used up. Capital leased from other industries is also included in intermediate inputs and recorded in services. The boundary between consumption of intermediate inputs and gross fixed capital formation is not always clear. In general, intermediate inputs are goods and services that are immediately transformed or used up in the process of production within one year while gross fixed capital formation involves the acquisition of capital assets which contribute to production for more than a year. Also included in intermediate consumption is the value of all goods and services used as inputs into ancillary activities.

19.50    The separation of intermediate inputs into the three categories – energy, materials and services can be useful for analysis of the effects of changes in the input mix on output growth. For example, increases in the proportion of services intermediate inputs could reflect growth in out-sourcing. Separate deflators are used to deflate each input to derive a Laspeyres volume index for intermediate inputs. 

19.51    The intermediate inputs indices for energy, materials and services and their respective shares are sourced from the supply-use tables compiled by the ABS. The classification of supply–use products into these three categories is provided in Appendix 2 of the KLEMS Information paper. Data for the three non–market industry divisions (i.e. Public administration and safety, Education and training, Health care and social assistance) are excluded.

19.52    The main advantage of deriving the indices and shares for energy, materials and services using this method is to control for heterogeneity in both the prices and volumes of the components and to recognise more explicitly that the way in which each of these components contributes to production differs. A key development in the supply-use tables has been the wider application of the double deflation method; that is, real output and real intermediate inputs are derived separately for most industries. By sourcing more specific price deflators, the approach enables improved volume estimation, particularly for intermediate inputs.

19.53    The supply-use table is a powerful tool to compare and contrast data from various sources and improve the coherence of the economic information system.  It reconciles the supply of products within the economy within an accounting period with their use for intermediate consumption, final consumption, capital formation, and exports.  They permit an analysis of markets and industries and allow productivity to be studied at this level of disaggregation.  The S-U table tracks the production and consumption of 301 groups of products across 67 groups of industries in a time series stretching back to 1994–95.  These groupings facilitate the aggregation of product groups into energy, materials and services.  Shown in Table 3 is a representation of the intermediate use component of the supply-use table.  The tables are calculated on both a current price basis (for estimating the KLEMS cost shares) and volume basis (for deriving the KLEMS indices for energy, materials and services).

19.54    Industry value added is equal to the total value of gross outputs at basic prices less the total intermediate consumption at purchasers' prices.

19.55    A key development in the supply-use tables has been the wider practice of using the double deflation method; that is, real gross value added and real intermediate inputs are derived separately for most industries. By sourcing more specific price deflators, the approach enables improved volume estimation, particularly for intermediate inputs.

19.56    The aggregate output for the market sector (or twelve selected industries) is the sum of gross value added produced by the component industries at basic prices. Basic prices are the prices producers receive and exclude taxes less subsidies on products. This valuation is consistent with the recommendations of the 2001 OECD Manual - Measuring Productivity, which states that:

From the perspective of productivity measurement, the choice of valuation should reflect the price that is most relevant for the producer's decision making, regarding both inputs and outputs. Therefore, it is suggested that output measures are best valued at basic prices.⁸⁴

19.57    The basic price valuation aligns the concept of production with that of factor incomes which include other taxes less subsidies on production and imports. Since industry value added is also at basic prices, the industry shares of aggregate output to sum to unity. Moreover, valuation consistency is necessary for additive growth accounting between industry and aggregate productivity measures. 

19.58    The aggregate output measure for calculating the economy wide labour productivity, i.e. GDP per hour worked, is valued at purchasers' prices, inclusive of taxes less subsidies on products.

19.59    Productivity growth accounts are most useful when presented over productivity growth cycles. MFP growth cycles are defined as periods between selected peak deviations of annual MFP from their corresponding long-term trend estimates. MFP is widely used as an indicator of technological change. In the short to medium term, MFP estimates are subject to data limitations and assumptions, such as variations in capacity utilisation, economies of scale and scope, reallocation effects of capital and labour, and measurement error.

19.60    Variations in the utilisation of inputs would ideally be measured as changes in inputs when MFP is calculated. However, due to current data limitations, reliable information for adjusting capital service flows for variation in utilisation are not available.⁸⁵

19.61    Growth cycle averages, within the growth account not only scale the growth according to its contribution, average growth rates between growth-cycle peaks dampens cyclically related distortions like capacity utilisation rate. To facilitate this, the growth cycle peaks need to be selected. They are chosen with reference to peak deviations which are determined by comparing MFP estimates with their corresponding long-term trend. The peak positive deviation between these two series is the primary indicator of a growth-cycle peak. General economic conditions at the time are also considered. In this way, most of the effects of variations in capacity utilisation and much of the random error is removed. However, average growth rates may still reflect any systematic bias resulting from the methodology and data used.

19.62    The ABS publishes growth cycles in both the ASNA and in Estimates of Industry Multifactor Productivity. They are available for the market sector, 12 selected industries, and each market sector industry.⁸⁶

19.63    In addition, the approach used to identify growth cycle peaks has been strengthened to ensure that growth cycle peaks are resilient to revisions to upstream data sources by adopting a multiple filter approach. In addition to the Henderson 11 filter, the Hodrick and Prescott⁸⁷, and Christiano and Fitzgerald⁸⁸ filters are used. The multiple filter approach copes better with volatility for lower aggregates (like industry) than any single filter.

19.64    For industry growth cycles, a peak is considered robust if deviations equal to, or greater than one percentage point are identified by all three filters. Where identified robust peaks were found less than four years apart (peaks inclusive), additional rules were required to obtain growth cycles of a reasonable length. Additional criteria include:

• Choosing the peak with the relatively largest deviation;
• If the difference in deviation is negligible, choose the peak which produces the longer cycle;
• If the two adjacent peaks have a similar deviation size and suggest a similar cycle length, assess with the prevailing macro-economic conditions;
• Consider the ‘nearly’ robust peaks (i.e., suggested by the three filters but with a deviation of less than one percentage point) next to neighbouring troughs; and
• Test for deterministic trend.⁸⁹

19.65    Growth cycles are also available for industries that have long periods of decline in MFP growth. Peaks in this context still represent a deviation from a (declining) trend, and thus indicate where an industry has halted the decline in productivity for a short period. This phenomenon can be seen in Mining and Electricity, gas, water and waste services, and Rental, hiring and real estate services.

19.66    The method adopted to estimate experimental State Multifactor productivity (MFP) - output produced per unit of combined inputs of labour and capital - aligns with the concepts and definitions used for MFP industry and market sector aggregates.

19.67    State output and experimental capital stock data is sourced from Australian National Accounts: State Accounts while labour inputs are sourced from Labour Force, Australia. State output is defined as Gross Value Added (GVA) in chain volume terms while labour inputs are defined as hours worked.

19.68    A number of simplifying assumptions have been adopted in addition to those adopted at the national level. Where State level data is unavailable, national industry proportions are applied to impute the missing values:

• National inventories are allocated to States using State current price GVA proportions for the stock of inventories, as a State dimension is not available. The ABS also compared allocations using estimated resident population proportions and found that the State MFP aggregates were not sensitive to either choice.
• To separate State by industry combined gross operating surplus and mixed income (GOSMI) into its components, gross mixed income (GMI) is estimated using the same industry’s GMI proportion in GOSMI at the national level. GMI was then split into income attributable to capital and labour using the same method to impute labour and capital shares of GMI at industry national level.

19.69    Rental prices by State by industry are imputed using the national industry asset rental prices. This method assumes there is no variation in price between the States for any given asset in a given industry for the same year. For example, the rental price of other transport equipment in wholesale trade is assumed to be the same across all States and territories. This simplifying assumption is not expected to distort rental prices significantly because, in estimating state capital stock, the nationally assumed asset lives (and therefore depreciation rates), and GFCF price indexes were applied to the same assets at State level. Importantly, for any given asset, variations in the rental prices between industries are completely captured under this method.

19.70    National accounts data constitute the source of output measures required by a variety of productivity measures. Output data for the annual MFP statistics are sourced from the Supply Use tables which are used as the key framework for balancing national accounts at the ABS. The industry gross output is the basic ingredient of output measures. Industry gross output equals value added based output plus intermediate inputs and is used in the KLEMS growth accounting framework. 

19.71    Chapter 9 describes the definitions of gross output, intermediate inputs and gross value added in detail, and Tables 9.1 to 9.32 outline the data sources and methods used in the estimation of each of these for each industry. For the years from 1994-95 up to the year previous to the latest year, these estimates have been compiled using Supply Use tables and are in balance with the expenditure estimates. The main data source for non-financial corporations and non-profit institutions serving households (NPISH) in the annual benchmarks is the Annual Industry Survey (AIS), the results of which are published in Australian Industry.