INTRODUCTION
For all Industries, Output equals the total value of production. In IMPLAN, this represents an Industry’s annual production in a given year in Producer Prices.
The Output of an Industry can be measured in two different ways. The total value of production of an Industry can be captured by the Industry’s total receipts (sales) or by the Industry’s total costs of production (expenditures).
Output is a critical component of Economic Impact Analysis (EIA) in that it is the basis for understanding how increased demands for final goods and services (Output) affect the necessary inputs required to satisfy those demands. The Industry’s expenditures are known as the Leontief Production Function (LPF). The LPF describes how each Industry will allocate Output and is the driving force behind the estimation of backward linkages and multipliers.
IMPLAN estimates Output by Industry for every zip code, county, and state in the U.S. Read more about the data sources and procedures for estimating Output in Industry Output Data.
MEASURING OUTPUT
The Output of an Industry can be measured in two different ways: by its total receipts or total expenditures.
The first way to capture the Industry’s value of production is through the Industry’s receipts. Measuring this way, an industry’s total value of production, or Output, consists of: Intermediate Output (IO) and Final Demand (FD). Intermediate Output (IO) includes production consumed by other industries as one of their inputs into their production. Final Demand (FD) includes production consumed by households and other Institutions.
Output = Intermediate Output (IO) + Final Demand (FD)
The second way to capture an Industry’s value of production is through the Industry’s costs of production. In order to generate this Output, Industries purchase raw materials and services from other industries (Intermediate Inputs), pay for labor (Labor Income), pay taxes (Taxes on Production and Imports less subsidies), and generate profits (Other Property Income). Output is the sum of all of these components (described in more detail below). For now,
Output = Intermediate Inputs (II) + Value Added (VA)
Where Intermediate Inputs (II) includes expenditures for inputs from other Industries and Value Added (VA) includes expenditures on labor, taxes, and includes measures of profit.
COMPONENTS OF OUTPUT
An Industry’s Output is the sum of its Intermediate Inputs and its Value Added.
- Intermediate Inputs are the goods and services required for the Industry to produce its own good(s) and/or service(s).
- Value Added represents the additional value embodied in the Industry’s product above and beyond the raw inputs. Value Added can be interpreted as the Industry’s contribution to regional GDP. This additional value comprises Labor Income, Other Property Income, and Taxes on Production and Imports net of subsidies. Labor Income includes both Employee Compensation and Proprietor Income.
Each Industry allocates a different share of Output to each of the component parts. For example, service Industries generally have a larger share of Output going to Labor Income, while goods-producing Industries generally have a higher share of Output allocated to Intermediate Inputs.
OUTPUT BY INDUSTRY TYPE
For all Industries, Output equals the total annual value of production.
- For service Industries other than wholesale and retail, the value of production equals revenue (sales).
- For wholesale and retail Industries, the value of production equals the wholesale margin and retail margin, respectively, which is not gross sales. The value of production for wholesale and retail Industries is the value of the services they provide; it does not include the value of the items sold within their establishments.
- For farm Industries, the value of production equals revenue less net inventory change less on-farm consumption.
- For all other Industries, the value of production equals revenue less net inventory change.
For more information about how Industry Output is estimated in IMPLAN see Industry Output Data.
OUTPUT IN ECONOMIC IMPACT ANALYSIS
VALUE OF PRODUCTION VS. SALES
Defining Output as value of production is essential for accurate economic impact analysis, both to avoid over- or under-stating total impacts and to correctly attribute impacts to the correct industries involved.
In the case of the wholesale and retail Industries, the wholesale and retail establishments do not produce the items sold in their establishments; thus, we would not want to attribute the value of their sales entirely to their industry.
If the specific items purchased from the wholesaler/retailer are known, one can:
- Apportion the sales value among the Industries that produced the goods sold, the Industries that transported those goods from the producer to the wholesaler and retailer, and finally to the wholesale and retail industries that sold those goods. This happens automatically within IMPLAN when utilizing a Commodity Event to estimate indirect and induced impacts.
If the exact items purchased are unknown (i.e., it is an unknown mix of items purchased from the wholesaler/retailer), it is not possible to identify the producers and transporters. Therefore the appropriate procedure is to:
- Capture the wholesale/retail margin only. This is the default set-up when running a direct impact on a wholesale or retail Industry using an Industry Event.
REPORTING OUTPUT
Because Output includes the value of Intermediate Inputs, it therefore includes portions of the value of other Industries’ own Output. In contrast, Value Added includes just the additional value added by an Industry and can be readily compared to a region’s GDP; thus, it is typically recommended to focus on Value Added, rather than Output, when reporting impact results.
Because Output includes Value Added (Employee Compensation, Proprietor Income, Other Property Income, and Taxes on Production and Imports net of subsidies), one should never add any of those elements to Output when reporting, as this would be double counting those elements. Similarly, the tax impacts reported in IMPLAN are components of the Value Added impacts and likewise should never be added to Output (or to Value Added).
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Written September 17, 2019
Updated July 23, 2024