MANUFACTURING

Estimation of Manufacturing Output, Intermediate Consumption and Value Added

International WorkshopFrom Data to Accounts: Measuring Production in

National Accounting8-10 June 2009, Beijing, China

UN STATISTICS DIVISION

Content of presentation

Some basic principles in Manufacturing

International Recommendations for Industrial Statistics 2008

Some basic principles in Manufacturing

Manufacturing industries

Industrial classifications, such as ISIC - identify a group of manufacturing industries

Manufacturing industries Produce goods such as machineryProduce industrial services such as machinery repair

and installation Both goods and services produced should be

included in the Manufacturing output

Classification of units

Principal activity The activity whose value added exceeds that of any other

activity carried out within the same unit

Secondary activities Activities carried out within a single producer unit in addition

to the principal activity and whose output, like that of the principal activity, must be suitable for delivery outside the producer unit

Ancillary activities Incidental to the main activity of an enterprise Facilitate the efficient running of the enterprise but does not

normally result in goods and services that can be marketed

Determineswhere the unit

will be classified

Treatment of Ancillary Activities (1)

Ancillary activity – a productive activity undertaken with the sole purpose of producing services for IC within the same enterprise

1993 SNA – ancillary activities are integrated with the establishments they supportDepict the production process as it is performedAncillary unit is not recognized by its own activityStructural decomposition of GDP by economic activity is

not depicted correctlyRegional GDP can not be compiled accurately

2008 SNA - units undertaking ancillary activities to be treated as an establishment in certain cases

Treatment of Ancillary Activities (2)

When an ancillary activity is recognized as a separate establishment?

An enterprise in which different kinds of activities undertaken are either horizontally or vertically integrated

An establishment undertaking ancillary activities is statistically observable, i.e. records of its transactions are readily available

The ancillary units are in a geographical location different from the establishments they serve

Ancillary establishment should be allocated to the industrial classification corresponding to its own principal activity

Statisticians should not make extraordinary efforts to create separate establishments for these activities artificially in the absence of suitable basic data being available

Treatment of Ancillary Activities (3)

Output of ancillary establishment

Should be derived on a sum of cost basis, i.e. all cost of production incl. the cost of capital used

Output is deemed to be market when the parent enterprise is a market producer and non-market otherwise

Output is treated as intermediate consumption of the establishments it serves and should be allocated using appropriate indicator (VA, output, employment)

Output of ancillary establishments

Case 1. An enterprise with 2 establishments and a headquarter (ancillary unit)

Establishment 1 Establishment 2 Headquarter

IC = 100 IC = 30 IC = 30

VA = 100 VA = 70 VA = 15

Output 1 = 200 Output 2 = 100 Output 3 (imputed) = 45

Case 2. Treatment of the headquarter (ancillary unit) as an establishment

Establishment 1 Establishment 2 Headquarter

IC = 100 IC = 30

2/ 3 output 3 = 30 2/ 3 output 3 = 15

IC = 30

VA = 70 VA = 55 VA = 15

Output 1 = 200 Output 2 = 100 Output 3 (imputed) = 45

VA=VA1+VA2+VA3 == 140

VA=O1+O2–(IC1+IC2+IC3) == 140

Valuation principles (1)

Basic Price

Basic priceFactor costs

+ Other taxes on production

- Other subsidies on production

Factor costs

+ Taxes on products(excl. VAT andother deductibletaxes)

- Subsidies onproducts

Producers’ Price

Producers’ price

+ Any transportand trade marginsinvoiced separatelyto the purchaser to take delivery

Purchasers’ Price

Output and VA

IC

Valuation principles (2)

Total VA at basic prices =

GO at basic prices – IC at purchasers' prices

If taxes and subsidies on products and production cannot be segregated

Total VA at factor cost =

GO at factor cost - IC at purchasers' prices

International Recommendations for Industrial Statistics 2008(IRIS 2008)

Background

Since 1950s, UN has published international recommendations to establish a coherent and uniform measurement of industrial activities – 1953, 1960, 1968 and 1983

IRIS 2008 adopted by the 39th session of the UN Statistical Commission

Revision of the 2008 SNA

Revision of the ISIC, Rev.4, and CPC, Ver.2

Efforts of countries to minimize the difference between the concepts of “census value added” and “national accounts value added”

Change in the valuation of industrial output to basic prices in accordance with SNA principles

Consistency with concepts, definitions and terminology used in statistical publications and regulations of other international organizations (IMF, OECD, ILO, Eurostat)

Need for Revision of IRIS

Scope of Industrial Sector Economic activities included in terms of ISIC or a

national classification compatible with ISIC:

Mining and quarrying (Section B) Manufacturing (Section C)

Electricity, gas, steam and air conditioning supply (Section D)

Water supply; sewerage, waste management and remediation activities (Section E)

Industrial activities in international waters, such as the operation of petroleum and natural gas wells, should be included if they are subject to the laws, regulations and control of the country concerned

ISIC, Rev.4

Units of Industrial Sector (1)

In conformity with the 2008 SNA production boundary all units engaged in economic activities within the scope of industrial sector should be covered

Units of all sizes and types of ownership, including: Household unincorporated enterprises as well as goods

produced by households engaging in industrial activities for own final consumption

Departments, establishments and similar units of General Government should be included if they are mainly engaged in industrial activities within the scope and are identifiable by accounting records kept by themGovernment units operating for profitGovernment units providing goods and services to

themselves – printing, publishing, ammunitions factories, etc.

Units of Industrial Sector (2)

Establishment - appropriate for production and employment analysis by economic activities

Enhance homogeneity in the measurement of the economic activity and more accurate presentation of regional economic reality

Allow grouping into similar kind of industries (ISIC)

Enterprise – appropriate for financial analysis by institutional sectors

CorporationNon-profit Institution serving industrial businesses Unincorporated enterprise

Outsourcing Outsourcing of production - when the principal unit

contracts another productive unit to carry out specific aspects of the production activity of the principal, in whole or in part in the production of a good or a service

Activity classification of the contractor – straightforward, does not change with the outsourcing

Activity classification of the principal - affected by the nature and extent of the outsourcing, requires conventions for a consistent treatment

Recommendation: the criterion on where to classify the principal should be based on the ownership of the physical input materials by the principal only

Types of Outsourcing (1) Outsourcing of support functions - the principal carries out the

production of goods or services, but outsources certain support functions, such as accounting or computer services, to the contractor

Principal remains classified to the respective ISIC class that represents the core production process

Contractor is classified to the specific support activity it is carrying out, e.g. ISIC class 6920 or 6202

Outsourcing parts of the production process - the principal outsources a part of the production process, but not the whole process, to the contractor as the principal owns the material inputs to be transformed by the contractor and thereby has ownership over the final outputs

Principal is classified in the appropriate class of ISIC as if it were carrying out the complete production process

Contractor is classified according to the portion of the production process he is undertaking

Types of Outsourcing (2)

Outsourcing of complete production processOutsourcing of service producing activities, including

construction Both the principal and the contractor are classified as if

they were carrying out the complete service activity support functions

Outsourcing of manufacturing activities to contractor, when the principal does not physically transform the goods at the location of its unitPrincipal owns the material inputs and thereby has

economic ownership of the outputs, but has the production done by others - he is classified to section C (Manufacturing)

Principal has the production done by others, but does not own the material inputs - should be classified to section G (Distributive trade)

Contractor is classified always to section C (Manufacturing)

Data Items (1) IRIS 2008 provides summary definitions of data

items for collection in industrial statistics13 groups of data items, incl. data items in quantity and

environmental protection expenditures

EmploymentEmployees engaged in own account production of fixed

assets and intellectual property products (software and database development, R&D, mineral exploration and evaluation, entertainment, literary and artistic originals) should be distinguished separately for the purpose of calculating output and capital formation

Compensation of employeesEmployee stock options are considered income in kind

Data Items (2) Other expenditures (part of IC calculation)

Purchases of goods and services Raw materials, parts and supplies – purchased from other

enterprises and delivered by other establishments of the same enterprise

Gas, fuels and electricity purchased Water and sewerage services Services except rentals

Cost of industrial services purchased and also delivered by other establishments of the same enterprise – maintenance, repair, installation, contract and commission work

Cost of non-industrial services – transport, communication, advertising

Purchase of good and services for resale in the same condition as received

Rental payments Non-life insurance premiums payable on establishment

property

Remember this item

Data Items (3) Sales (turnover), shipments and other

revenuesMarket sales to other enterprises, incl. transfers to

other establishments of the same enterprise and barter

Sales of goods and services purchased for resale in the same condition as received

Receipts for industrial work done or industrial services rendered – contract and commission works, maintenance and repair, R&D from industrial nature

Other non-industrial service revenues (may not be ascertain at the establishment level) – revenues from operating cafeterias, hostels, storage, transportation

E-commerce salesValue of own account fixed assets

Remember this item

Data Items (4)

Inventories and capital formationChanges in inventories - important for the calculation

of industrial output and intermediate consumption, valuation

Do not forget the new classification of non-financial assets Intellectual property products – their output should be

capitalized; if done on own account - the output should be valued at costComputer software and databaseResearch and developmentMineral exploration and evaluationEntertainment, literary and artistic originalsOthers

Gross output vs. Census output

Gross output at basic prices = + Value of sales (turnover), shipments and other revenues- Purchases of goods and services for resale in the same condition as received (usually from a secondary trade activity)+ Change in work-in-progress+ Change of inventories of finished goods+ Change in inventories of goods purchased for resale in the same condition as received

Census output – recommended to be discontinued

Census output = Cross output – Other non-industrial service revenues

Intermediate consumption and Census input

Intermediate consumption at purchasers’ prices = + Purchases of raw materials and supplies + Purchases of gas, fuel and electricity + Purchases of water and sewerage services

+ Purchases of services except rentals + Rental payments+ Changes in inventories of materials, fuels and supplies

Census input at purchasers prices – not recommendedCensus input = Intermediate consumption – Cost of

non-industrial services

Revalue to current prices and adjusts the

purchases to uses

National Accounts VA and Industry VA

IRIS 2008 makes the concept of Industry Value Added as close as possible to the concept of National Accounts Value Added

However

Depending on the organization of the country some adjustments would still be needed to get to the National Accounts concept

FISIM - the cost is included in the interest paid and interest received

Insurance service charge - the cost is included in the premium

Thank You