INTRODUCTION
IMPLAN’s global products have very similar Input-Output (I-O) and Social Accounting Matrix (SAM) structures as IMPLAN’s U.S.-based Products. However, one of the largest differences between the two is that the global products present Industry production in basic prices rather than producers’ prices. Valuation in basic price treats taxes and subsidies differently than valuation in producers’ price. This difference in the treatment of taxes and subsidies results in differences in how an Industry’s Output and Value Added are reported. As a result, Industry Output and Value Added in the Canada Provincial and International Products are not comparable to those reported by the U.S.-based Products.
This article defines Industry production functions, with specific focus on the components of Value Added and how the reporting of those Value Added components can vary across IMPLAN products. The article then presents and compares the Industry production functions for each product and discusses implications for modeling. Read more about basic prices and producers’ prices in Concepts of Valuation in National Economic Accounts.
INDUSTRY PRODUCTION FUNCTIONS
Production functions detail the relationship between an Industry’s inputs and its Output. In effect, they trace the backward linkages, or the interconnectedness of an Industry to other Industries from which it purchases inputs to produce its Output and to Institutions to which it pays labor income, taxes, and more. IMPLAN uses the Leontief Production Function (LPF), also known as the Fixed-Proportions Production Function. The LPF assumes that inputs and outputs increase proportionally to one another. In other words, the same quantity of inputs is needed per unit of output.
MEASURING OUTPUT
One way to measure the Output of an Industry is by the Industry’s total costs of production (expenditures). For an Industry to generate Output, it must purchase raw materials and services from other Industries, pay for labor, pay taxes, and generate profits. Output is the sum of all of these components (described in more detail below). Broadly,
Output = Intermediate Inputs (II) + Value Added (VA)
Intermediate Inputs (II) include expenditures for goods and services from other Industries and Institutions (as well as the same Industry itself). Value Added (VA) includes expenditures on labor and taxes as well as measures of profit.
COMPONENTS OF VALUE ADDED
At the most basic, conceptual level, Value Added is comprised of three broad components: Employee Compensation (EC), Taxes on Production and Imports less Subsidies (TOPI), and Gross Operating Surplus (GOS). Beyond that, each of IMPLAN’s products can have more detailed elements of Value Added, depending on the valuation convention used (producers’ prices or basic prices) and the underlying availability of data.
The table below highlights the differences in the reporting of Value Added among IMPLAN’s core U.S.-based Products, Canada Provincial Product, and International Product.
Table 1. Comparison of Components of Value Added for IMPLAN’s U.S., Canada Provincial, and International Products
| Value Added Component |
Definition |
U.S.-based |
Canada Provincial | International |
|---|---|---|---|---|
| Employee Compensation (EC) | Total payroll cost of the employee including wages and salaries, all benefits (e.g., health, retirement), and social insurance contributions | No differences | No differences | No differences |
| Taxes on Production and Imports net of Subsidies (TOPI) |
All taxes or subsidies on production, including taxes on the production and import of goods and services, the employment of labor, and the ownership or use of land, buildings, or other assets used in production |
U.S. reports OTXS and TOPS combined as TOPI, all TOPI is part of Value Added* |
Canada reports OTXS and TOPS separately, only OTXS is part of Value Added* |
International reports OTXS and TOPS separately, only OTXS is part of Value Added* |
| Gross Operating Surplus (GOS) |
Compensation of the suppliers of capital services. Derived by subtracting II, EC, and TOPI from Industry Output. Includes consumption of fixed capital (CFC) and owner income and profits |
U.S. reports Proprietor Income (PI) separately, Other Property Income (OPI) is estimated subtracting PI from GOS |
Canada reports Gross Mixed Income (GMI) and Gross Operating Surplus (GOS) separately, depending on whether the producer is incorporated; GMI is not a sub-component of GOS |
Gross Operating Surplus (GOS) is reported as one |
* Other Taxes on Production Net of Subsidies (OTXS) and Taxes on on Products Net of Subsidies (TOPS)
Employee Compensation
Employee Compensation (EC) is compensation that is payable to workers employed in the production process. EC reflects the total payroll cost of employees, including wages and salaries, benefits, and contributions to social insurance. EC does not include incomes of self-employed individuals. There are no differences in EC amongst IMPLAN’s core U.S.-based Products and the Canadian Provincial and International Products.
Taxes on Production and Imports
Taxes on Production and Imports Net of Subsidies (TOPI) are any taxes that are payable or receivable as a result of engaging in production.1 Broadly, TOPI includes taxes on the production and import of goods and services, the employment of labor, and the ownership or use of land, buildings, or other assets used in production.
If production is valued in basic prices (as opposed to producers’ prices), total TOPI can be separated into Taxes on Products Net of Subsidies (TOPS) and Other Taxes on Production Net of Subsidies (OTXS). The distinction between TOPS and OTXS is that TOPS is directly tied to a unit of Output. This means that if no Output is produced (for example, during a plant closure), no taxes accrue. For this reason, TOPS is paid out of an Industry’s Intermediate Inputs (II), not out of Value Added (VA). OTXS, in contrast, are not directly linked to Output and must be paid whether a business has sales or is profitable. These taxes generally include land or property taxes, government licensing fees, and taxes on assets or labor employed.
Because they are valued in basic prices, the Canada Provincial and International Products report OTXS and TOPS separately and only OTXS is part of Value Added. In both products, TOPS is paid to a holding account, the TOPS “Industry”, which later remits the total TOPS to the Government. More information about the TOPS Industry is provided below.
This is in contrast with the U.S.-based Products, which are valued in producers’ prices. Because U.S.-based Products are valued in producers’ prices, TOPI is not disaggregated into its component parts OTXS and TOPS. In the U.S.-based Products, all TOPI is part of Value Added. Thus, it is not appropriate to compare Industry Value Added between U.S.-based Products and the global products.
Gross Operating Surplus
Consumption of fixed capital (CFC) and owner income and profits are accounted for in the form of Gross Operating Surplus (GOS). GOS is a balancing term in the compilation of national statistics. National statistics agencies derive GOS by subtracting II, EC, and TOPI from Industry Output. Then, depending on data availability and the structure of a country’s national accounts, GOS can be further distinguished and defined as described below.
In the U.S.-based Products, data is available to add more detail and GOS is separated into two sub-components: Proprietor Income (PI) and Other Property Income (OPI). PI is the income of sole proprietorships, partnerships, and tax-exempt cooperatives. OPI includes CFC, corporate profits, and net business current transfer payments.
As in the case of the U.S.-based Products, additional data is available for the Canada Provincial Product to add more detail to Gross Operating Surplus (GOS). However, the derivation and terminology between the U.S.-based and Canada Provincial Products differ. In the Canada Provincial Product, GOS is not separated into components. Rather, the owner income and profits component of GOS is allocated to Gross Mixed Income (GMI) or Gross Operating Surplus (GOS) depending on whether the producers/owners are incorporated.
If a producer is incorporated, income and consumption of fixed capital of producers is included in GOS. If a producer is unincorporated, income and consumption of fixed capital of producers is included in GMI. For Government and NPISH sectors, consumption of fixed capital is always included in GOS. The distinction between GMI and GOS arises out of the fact that corporate entities are legally separated from their owners, whereas unincorporated entities are not. The implication is that, for incorporated businesses, there is a clear distinction between compensation of employees and gross operating surplus. This is not the case for unincorporated businesses because an unincorporated owner could elect to pay themselves either as wages and salaries or as returns to capital, the election of which is arbitrary. This is explained more in the next section.
In IMPLAN’s International Product, data is not available to add more detail to Gross Operating Surplus (GOS). Thus, GOS is reported in its entirety.
COMPARISON OF INDUSTRY PRODUCTION FUNCTIONS
U.S.-BASED PRODUCTS
In the U.S.-based Products, an Industry’s Output is the sum of its Intermediate Inputs (II) and Value Added, where Value Added is derived as:
Valued Added =
Employee Compensation (EC)
plus Proprietor Income (PI)
plus Other Property Income (OPI)
plus Taxes on Production and Imports Net of Subsidies (TOPI)
Note that, in this case, TOPI includes all taxes or subsidies on production, including taxes on the production and import of goods and services, the employment of labor, and the ownership or use of land, building, or other assets used in production. In other words, TOPI includes taxes on products and taxes on production. This is one of the major distinctions between IMPLAN’s U.S.-based Products and the global products (Canada Provincial and International), the latter of which separate TOPS and OTXS.
Additionally, in the U.S., data is available to separate out Proprietor Income (PI), or payments received by self-employed individuals and unincorporated business owners, and Other Property Income (OPI). OPI is treated as leakage because the income generated as part of OPI is assumed to go to recipients outside of the region. This means that any OPI estimated as part of an analysis will not generate Induced Effects.
CANADA PROVINCIAL PRODUCT
Like the U.S.-based Products, in IMPLAN’S Canada Provincial Product an Industry’s Output is the sum of its Intermediate Inputs (II) and Value Added. However, an Industry’s Value Added is derived as:
Value Added =
Employee Compensation (EC)
plus Gross Mixed Income (GMI)
plus Gross Operating Surplus (GOS)
plus Other Taxes on Production Net of Subsidies (OTXS)
Note that, in this case, OTXS only includes taxes on production. Taxes on products are paid out of the Industry’s II to the TOPS account and are not part of an Industry’s Value Added. The TOPS account will be described in more detail in a subsequent section, but it is essentially a holding sector used for accounting purposes only.
Like the U.S., data is available to add more detail to components of Gross Operating Surplus (GOS). However, Canada uses different terms. Gross Mixed Income (GMI) reflects income to producers when the producer is unincorporated. This includes not only the capital put forth by the unincorporated producer, but also the labor provided by the owner. Whereas incorporated businesses have clear distinctions between EC and GOS, unincorporated businesses do not have a clear distinction. Therefore, the owner’s compensation as an employee and their gross operating surplus are combined to one form of income known as Gross Mixed Income.
GMI includes three components: (1) farm income or the gross proceeds from the sale of agricultural products from unincorporated farmers, (2) non-farm income excluding rent or the net earnings of unincorporated proprietors from their own business (except agriculture), and (3) rental income of individuals as their capacity as owners, including the implicit income they generate by inhabiting a dwelling they own (Industry 176 Owner-occupied dwellings).
Gross Mixed Income is “gross” in that there is no deduction made for the cost of replacing capital that is used as part of the production process. When consumption of fixed capital is accounted for, the result is Net Mixed Income. Net mixed income represents the return to owners who have risked the capital by using it in production. In the Canada Provincial Product, only Net Mixed Income is treated as part of Labor Income, which will generate Induced Effects. Gross Operating Surplus (GOS) reflects income to producers when the producer is incorporated. Like the U.S.’s OPI, GOS is assumed to go to recipients outside of the region and will not generate Induced Effects.
INTERNATIONAL PRODUCT
In IMPLAN’S International Product Value Added is derived as:
Value Added =
Employee Compensation (EC)
plus Gross Operating Surplus (GOS)
plus Other Taxes on Production Net of Subsidies (OTXS)
Like the Canada Provincial Product, OTXS in the International Product only includes taxes on production. Taxes on products are paid out of the Industry’s II to the TOPS account and are not part of an Industry’s Value Added.
In the International Product, data is not available to add more detail to components of Gross Operating Surplus (GOS). Thus, GOS is reported in its entirety. As there is no way to separate out unincorporated owner income from GOS, it is not treated as part of Labor Income and will not generate Induced Effects.
THE TOPS ACCOUNT
As mentioned previously, in IMPLAN’s global products (Canada Provincial and International), Taxes on Products Net of Subsidies (TOPS) are paid out of an Industry’s Intermediate Inputs (II) rather than Value Added (VA). TOPS are also paid by final consumers when they purchase goods and services. This necessitates the TOPS account. The TOPS account is a holding sector and receives all TOPS payments from each Industry and final consumer. The TOPS account then pays all collected TOPS to the Government. As such, the TOPS account is used for accounting purposes only and should not be used to model impacts.
RELATED ARTICLES
Concepts of Valuation in National Economic Accounts
Output, Value Added, and Double Counting
1Taxes on production are payable to the Government, but only include taxes payable as a result of engaging in production. They do not include income taxes payable by the recipients of incomes accruing from production, whether employers or employees. These taxes are recorded from a different account (not TOPI) as current transfers.
Written January 7, 2025