Production function question
In considering an industry's production function versus value added coefficients coefficients, are interest payments on loans (say to a bank) allocated to a finance industry in the production function, or are those payments allocated to OPTI in value added? What about the associated principal payments? I'm developing a new industry in implan via primary data collected and I'm trying to make sure that total outlays are equal to the total outputs. Similary, rental payments (say for land or building space) are allocated to OPTI? Depreciation, I expect, is not included, but I want to make sure I know what a capital consumption allowance is. Thanks for the clarifications, Todd
Hello Todd, The governing logic behind what is included in OPTI is given by the Bureau of Economic Analysis (BEA) National Income and Product Accounts (NIPA). These are the set of accounts by which GDP and Personal Income, for example, are estimated. For an overview of how the NIPAs work, and how they relate to input-output tables, you might want to consult these documents: www.bea.gov/national/pdf/nipaguid.pdf www.bea.gov/papers/pdf/IOmanual_092906.pdf Interest payments are not included in intermediate spending; rather, “net interest” is part of value added. Interest payments are reported on a net basis (business interest payments less business interest receipts). It is included in OPTI. Principal payments are capital transfers, which are not part of current accounts; accordingly, they are not included anywhere in IMPLAN data. Perhaps more intuitively, the logic of this is that moving principal, i.e., a capital asset, from one entity to another does not create supply or demand and affects neither GDP nor Value Added. Rental income that accrues to final demand institutions, e.g., households, is part of OPTI (OPTI transfers that value to the institutions that own the rented assets, effectively). Rental expenses in general, however, e.g., rented office space or a rented apartment, are paid through the real estate sector (440) or one of the “renting” sectors (442, 443, 444, 445, 446). Capital consumption allowance is an adjusted measure of depreciation. The adjustment, in the NIPAs, is called Capital Consumption Adjustment; the purpose is to change depreciation from a historical cost basis to a market value basis. It is included in OPTI. One explanation for this is that corporate profits, as reported by corporations, are net of depreciation, which generally is a deductible expense. To get a proper estimate of Gross Domestic Income (equal to Value Added and to GDP), that depreciation needs to be added back but converted to a market price basis. Regards, IMPLAN Staff
Thank you for this helpful explanation. I am constructing a survey that walks them through gross earnings to net proceeds after taxes (total outputs = total outlays), so it is a bit of a challenge to align what they report/think of to how to appropriately allocate in an IO sense. Anyway, a related question. Firms regularly purchase capital inputs (e.g., a farm buys a tractor) with a useful life more than a year, and is depreciable, with depreciation accuncted for in terms of income tax calculations. This purchase, say from a local retail firm (e.g., a John Deere store) has impact (at least with respect to the retail margin assuming the tractor is manufactured outside the local region) in the year that it is purchased (e.g., jobs at the John Deere store). Does this in anyway get reflected in the current accounts. and if so, how?
Todd, Investment and capital purchases are treated as final demand and are not included as part of an industry's production function. Capital purchases can be analyzed separately by impacting the retailer/wholesaler (which will, as you suggest, provide the impact created by the retail margin) or by margining the producer (if you know what was purchased). Margining: When the Item Being Purchased Is Unknown http://support.implan.com/index.php?option=com_content&view=article&id=226 Margining: When the Item Being Purchased Is Known http://support.implan.com/index.php?option=com_content&view=article&id=203 Regards, IMPLAN Staff
Thank you for the additional information. This is very helpful, as are the articles you included. Getting it 'right' is a detailed process, and perhaps i'm simply being too picky. So let me ask a few more follow up questions to this stream: Back to OPTI components, the IMPLAN glossary defines this equivalently as "Other property income" and says "It includes corporate profits, capital consumption allowance, payments for rent, dividends, royalties and interest income." First, earlier you said rental payments are applied to intermediate input expenditures through one of the rental (housing, machinery) sectors. Fine. And that rental income "accrues to final demand institutions... that OPTI transfers that value to the institutions that own the rented assets." Fine Now, the definition above says "payments for rent" are included in OPTI. Am I to presume that this means rental income (e.g., renting out some storage space in a warehouse) that is then paid to the owners of that industry that rents it out? It's probably just semantics, but i want to know for sure, since the definition in the glossary clearly says "payments" for rent. Second, does OPTI also include payments of dividends and royalties to owners as suggested in the definition. That's what i've always thought, so I want to make sure I am interpreting it correctly. Finally, back to interest. You told me earlier that interest payments (say on a loan) are allocated to OPTI as "net interest", where net interest = interest payments - interest receipts. In the definition above it says interest "income" but perhaps I should be reading it as "payments for interest" and that it is net interest. I'm not sure. Let's say the fruit farming industry pays $1M in interest. Does $1M go into OPTI? and as a positive number?
Hi Todd! 1. The definition, according to NIPAs, of the “rent with capital consumption adjustment” line that corresponds to IMPLAN’s payments from OPI to households of transfer code 15005, is “Earnings from the rental of real property by persons who are not primarily engaged in the real estate business. It also includes the imputed net rental income of owner-occupants and the royalties received by persons from patents, copyrights, and rights to natural resources.” a. Industries’ and households’ payments of rent, e.g., for a building or apartment, are paid to the “renting” industries. Rental income flows back to people from OPI payments to households. b. One entity’s rental payment is another’s rental income, but it might be better to think of OPI rent as “rental income.” 2. To your second question, you are correct in that OPTI does include dividends and royalty payments to owners. In general, it might be helpful to review the “detail” view of the IxC SAM, in which you can see individual components of OPI, e.g., payments of dividends. Additional Note, OPI pays enterprises, which then pays dividends. So, OPI does pay dividends, but the IMPLAN SAM is structured in such a way that dividends are routed through enterprise. The idea here is that Enterprises generally aligns with “corporations” in NIPAs, and corporations earn profits, retain profits, and pay dividends. 3. Your third question, using your example about the fruit farmer, this is a net value. It would be a positive value as long as they didn’t have a loss in dividends, royalties, etc. However, if the only interest transaction is a $1m payment, then $1m is all there is, so net interest would be $1m. Thanks!
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