MANUFACTURING Estimation of Manufacturing Output, Intermediate Consumption and Value Added

1. MANUFACTURING Estimation of Manufacturing Output, Intermediate Consumption and Value Added International Workshop From Data to Accounts: Measuring Production in National Accounting 8-10 June 2009, Beijing, China UN STATISTICS DIVISION

2. Content of presentation • Some basic principles in Manufacturing • International Recommendations for Industrial Statistics 2008

3. Some basic principles in Manufacturing

4. Manufacturing industries • Industrial classifications, such as ISIC - identify a group of manufacturing industries • Manufacturing industries • Produce goods such as machinery • Produce industrial services such as machinery repair and installation • Both goods and services produced should be included in the Manufacturing output

5. Determines where the unit will be classified 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

6. 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 support • Depict the production process as it is performed • Ancillary unit is not recognized by its own activity • Structural decomposition of GDP by economic activity is not depicted correctly • Regional GDP can not be compiled accurately • 2008 SNA - units undertaking ancillary activities to be treated as an establishment in certain cases

7. 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

8. 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)

9. Output of ancillary establishments VA=O1+O2–(IC1+IC2+IC3) = = 140 VA=VA1+VA2+VA3= = 140

10. IC Valuation principles (1) Purchasers’ Price Producers’ Price + Any transport and trade margins invoiced separately to the purchaser to take delivery Output and VA Basic Price + Taxes on products (excl. VAT and other deductible taxes) - Subsidies on products + Other taxes on production - Other subsidies on production Factor costs Factor costs Basic price Producers’ price

11. 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

12. International Recommendations for Industrial Statistics 2008 (IRIS 2008)

13. Background • Since 1950s, UN has publishedinternational 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

14. Need for Revision of IRIS • 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)

15. 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

16. 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 them • Government units operating for profit • Government units providing goods and services to themselves – printing, publishing, ammunitions factories, etc.

17. 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 • Corporation • Non-profit Institution serving industrial businesses • Unincorporated enterprise

18. 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

19. 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

20. Types of Outsourcing (2) • Outsourcing of complete production process • Outsourcing of service producing activities, including construction • Both the principal and the contractor are classified as if they were carrying out the complete service activitysupport functions • Outsourcing of manufacturing activities to contractor, when the principal does not physically transform the goods at the location of its unit • Principal 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)

21. Data Items (1) • IRIS 2008 provides summary definitions of data items for collection in industrial statistics • 13 groups of data items, incl. data items in quantity and environmental protection expenditures • Employment • Employees 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 employees • Employee stock options are considered income in kind

22. 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

23. Data Items (3) • Sales (turnover), shipments and other revenues • Market 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 sales • Value of own account fixed assets Remember this item

24. Data Items (4) • Inventories and capital formation • Changes 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 cost • Computer software and database • Research and development • Mineral exploration and evaluation • Entertainment, literary and artistic originals • Others

25. 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

26. 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 recommended Census input = Intermediate consumption – Cost of non-industrial services Revalue to current prices and adjusts the purchases to uses

27. 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

28. Thank You