MEASURING ECONOMIC MEASURING ECONOMIC PERFORMANCE:PERFORMANCE:

All you wanted to know All you wanted to know about GVAabout GVA

Stephen BashfordStephen Bashford

StructureStructure

• Gross Value Added (GVA)• Complementary measures

– Gross Disposable Household Income (GDHI)– Regional Index of Sustainable Economic Well-being (R-ISEW)

• See regional and sub-regional indicators http://economy.swo.org.uk/publications/

Gross Valued Added (GVA):Gross Valued Added (GVA):

Total value of goods and services produced through economic activity in any particular period

• GVA = GDP - Taxes + Subsidies (GDP is at market prices)• Taxes and subsidies not part of the value added in production• GDP = national; GVA = regional• GVA = Output = Income = Expenditure…

(1) OUTPUT

(2) INCOME

(3) EXPENDITURE

(1) Output (production) approach(1) Output (production) approach

Farmer’s value addedFarme

r

Value of wheat

Miller’s value added

Miller

Value of flourBaker’s value added

Baker

Wholesale value of breadGrocer’svalue added

Grocer

Retail value of breadFinal expenditure on bread

0 10p 20p

30p

40p

GVAFarmer’s value added

Miller’s value added

Baker’s value added

Grocer’svalue added

Intermediate expenditure

Final expenditure

Value added

Note that the sum of all value added is also equal to final expenditure.

0 10p 20p

30p

40p

(2) Income approach(2) Income approach• Income of all those involved in production process• Includes:

– Compensation of employees (wages and salaries) ~60%– Operating surplus (profit, interest…etc) ~30%– Mixed incomes (sole traders and self-employed) ~10%

• Excludes:– Transfer payments (pensions and social security); Direct taxes; ‘Shadow Economy’

(3) Expenditure approach(3) Expenditure approach

The value of expenditure on goods and services

C + G + I + X – M

C = Consumer expenditure on goods & services

G = Government expenditure

I = Investment in buildings and machinery

X-M = Exports minus imports

What is the GVA for Company A?What is the GVA for Company A?

Company ASales £100Cost of Sales £30Wages £40Expenses £20 £90Net profit £10

GVA for Company A £50Sales - CoS - Expenses £50Wages + net profit £50

Other calculations:

Employment based:

Net additional employment x GVA per FTE for sector

Turnover based:

Turnover x Turnover :GVA ratio for sector

Nominal vs. Real GVANominal vs. Real GVA

• Nominal GVA in current prices with no allowances made for inflation• Real GVA in constant prices i.e. a fixed year (2007)

GVAdeflator

RealGVA

RealGVA

2007

2008

Nominal GVA

ProductivityProductivity

How efficiently factors of production (land, labour and capital) are used in the production process

• GVA per job or GVA per hour• GVA per head as a proxy (from ONS)

–Resident vs. workplace: commuting effects–Non-active population factor

expansion

recession

Potential output

Actual output

Trend output

In The Challenge of Affluence (2006), economist Avner Offer says that the various forms of national accounts were not designed to measure welfare but cyclical changes in levels of economic activity:

Time

Ou

tpu

t

• Indicator of scale and growth

• Comparisons across time & place (but time lags) • Established methodology• Limitations are well documented

– Does not directly measure well-being; ‘Threshold hypothesis’– Distribution; Income inequality– Ignores externalities e.g. environmental– Includes ‘bads’ i.e. more expenditure on health care due to stress – To be considered alongside other economic, environmental and social indicators

GVA: What it does and does not doGVA: What it does and does not do

0%

20%

40%

60%

80%

100%

NE YH WM NW EM SW E ENG SE L

Agriculture ProductionConstruction Distribution, transport and commsBusiness services Public admin

Example 1: GVA composition 2008Example 1: GVA composition 2008

Example 2: Sub-regional GVA per head Example 2: Sub-regional GVA per head indicesindices

Example 3: Sub-regional GVA/head growth Example 3: Sub-regional GVA/head growth 1999-20071999-2007

• The amount that households have to spend or save after deduction of income and property taxes, National Insurance and social contributions

…the maximum amount that a household can (or has available at its disposal to) consume without reducing its real worth

Gross Disposable Household Income (GDHI)Gross Disposable Household Income (GDHI)

MethodologyMethodology

10,000

11,000

12,000

13,000

14,000

15,000

16,000

17,000

18,000

19,000

20,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

£

GVA per head

GDHI per head

SW GVA versus GDHISW GVA versus GDHI

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

£ m

illio

n

OperatingSurplus/MixedIncomeCompensation ofemployees

Property income,received

Social benefits

Other currenttransfers

Current taxes onincome, wealthetcSocialcontributions

Other currenttransfers, uses

Property income,paid

Components of SW GDHIComponents of SW GDHI

05,000

10,00015,00020,00025,00030,00035,000

£

GVA per head GDHI per head

But how is this affected by commuting? Again, work-based vs. resident-based.

Redistributive effectRedistributive effect

Regional Index of Sustainable Economic Regional Index of Sustainable Economic Well-being (R-ISEW)Well-being (R-ISEW)• Monetises social and environmental issues bringing them into the same analytical framework as economic indicators

• First ISEW by Cobb & Daly in 1989• First UK ISEW by nef and Professor Tim Jackson, University of Surrey in 1994•First R-ISEWs for all regions supported by RDAs, calculated in 2007

R-ISEW = Personal consumer expenditure

- adjustment for income inequality

+ public expenditures (non-defensive)

+ value of domestic labour & volunteering

+/- economic adjustments (net international position, net capital growth, consumer durables)

- defensive private expenditures

- costs of environmental degradation

- depreciation of natural capital

MethodologyMethodology

GVA per head versus R-ISEW per headGVA per head versus R-ISEW per head

5,000

7,000

9,000

11,000

13,000

15,000

17,000

19,000

21,000

23,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

£R-ISEW per head England GVA per head England

R-ISEW per head South West GVA per head South West

Capital growth, resource depletion, commuting

Components of SW R-ISEWComponents of SW R-ISEW

ConclusionsConclusions• Must fully understand the benefits and limitations of indicators. • GVA measures the total value of goods and services produced through economic activity.• ‘Circular flow’: GVA = Output = Income = Expenditure• Productivity describes how efficiently an economy is using its resources.• GDHI measures how much consumers have available to spend in the economy and reveals a ‘redistributive effect’.• The R-ISEW attempts to bring a number of indicators into a single framework. An effective model?

For briefings on these For briefings on these indicators and more…indicators and more…

http://economy.swo.org.uk/http://economy.swo.org.uk/