Output, Value Added, & Double-Counting

INTRODUCTION:

Gross Output and Gross Domestic Product (GDP) are both highly useful economic statistics that are published as part of the BEA's industry accounts. 

OUTPUT

Output is the value of an industry's production.  It can be measured in two ways: from the sales (income) perspective or the expenditures (spending) perspective.

1. From the sales (income) perspective, Output is the sum of sales to final users in the economy (GDP) + sales to other industries (Intermediate Inputs) + inventory change.  
2. From the expenditures perspective, Output is the sum of an industry's Value Added + Intermediate Inputs.

VALUE ADDED

Value Added is defined as the total market value of all final goods and services produced within a region in a given period of time (usually a quarter or year).  It is the sum of the intermediate stages of production. It is the sum of all added value at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time.  In other words, it is the wealth created by industry activity.

Value Added in a Social Accounting Matrix (SAM) model such as IMPLAN, is equal to Gross Domestic Product (GDP). In a balanced SAM model, total Value Added = total Final Demand.  

COMPARING OUTPUT & VALUE ADDED:

OUTPUT VS. VALUE ADDED 

Output is simply a measure of the total value of all goods produced. Value Added is a subset of Output and is a useful measure of wealth created by an economy.  An industry buys goods and services from other industries and remanufactures those goods and services to create a product of greater value (Output) than the sum of the goods that goes into its product (Intermediate Inputs). That increase in value is the value that the producer adds to the inputs as a result of the production process.  This added value is then used to pay labor and taxes with hopefully some remainder for profit.

DOES OUTPUT DOUBLE-COUNT?

Analysts sometimes focus on Output because it is bigger than Value Added.  However, because the Output of an industry requires Output from other industries, it double-counts if one attempts to use it as a measure of aggregate production.  

For example, suppose an entrepreneur named Doug sets up a shop called “Doug’s Computer Service” to install an operating system onto customers’ computers, as well as give some instruction on how to use it.  For this service he charges $100. If he services 100 customers:

     Revenue (Output) = $10,000

     Shop costs (electricity, rent, etc.) = $2,000

     Value Added = $8,000 (from this he pays property taxes, production taxes, and has a net
     profit) 

Based on the needs of his customers, Doug decides that he will order the computer for them and turn over a complete product.  The computer costs him $950 and he will tack on $50 for the additional hassle of buying the computer. Thus, for each unit the customer now pays $1,100 ($1,000 for the computer plus $100 for the service).  This time, if he services 100 customers: 

     Revenue (Output) = $110,000

     Computer costs = $95,000

     Other shop costs = $2,000

     Value Added = $13,000

Doug’s Output has gone up 1,000% but Value Added only grew by 63% (his costs increased by 4,750%).  His firm’s huge increase in Output would be very misleading as an indicator of how the local economy is doing.  If the computer is manufactured locally, then the manufacturer’s Output will show up as an Indirect Effect, which will double count its contribution to the economy if it is also included in Doug’s firm’s overall Direct Output Effect.  Thus, while Output is an essential statistical tool needed to study and understand the interrelationships of the industries that underlie the overall economy, because of its duplicative nature it may not be a good stand-alone indicator of the overall health or contribution of an Industry. For more, visit the BEA here: https://www.bea.gov/help/faq/1197.

Written July 12, 2019

Updated February 14, 2020