The measurement of value added at constant prices by industry is an important part of national economic accounting. Information on value added at constant prices by industry is necessary to research on national economic growth and changes of industrial structure. This chapter introduces methods of measuring value added at constant prices by industry in China.
There are two approaches to estimating value added at constant prices: deflation and extrapolation. The first approach, deflation, includes two means, double deflation and single deflation. Double deflation means that output and intermediate input at current prices in the accounting period are respectively deflated by using the output price index and the intermediate input price index to obtain output and intermediate input at constant prices in the accounting period. The difference between them is defined as value added at constant prices in the accounting period. There are two means of single deflation. One is to deflate value added at current prices in the accounting period with the output price index to derive value added at constant prices in the accounting period. The other means is to deflate value added at current prices in the accounting period by using the intermediate input price index to derive the value added at constant prices. Both ways assume that price changes of output basically keeps the same proportion as those of intermediate input.
There are also two means of extrapolation, double extrapolation and single extrapolation. Double extrapolation means that output and intermediate input at constant prices of the previous year are respectively extrapolated by using the volume index of output and intermediate input to achieve the values of output and intermediate input at constant prices in the accounting period. The difference between them is defined as value added at constant prices in the accounting period. There are also two means of single extrapolation. One is to extrapolate value added at constant prices of the previous year by using the volume index of output to achieve value added at constant prices in the accounting period. The other is to extrapolate value added at constant prices of the previous year by using the volume index of intermediate input to obtain value added at constant prices in the accounting period. Both methods of single extrapolation assume that the volume change of output basically keep the same proportions as that of intermediate input.
Therefore, the estimate of value added at constant prices derived through deflation depends on output, input, and value added at constant prices in the accounting period and related price indices, whereas estimates of value added at constant prices derived through extrapolation are determined by output, intermediate input and value added at constant prices of the previous year and related volume indices.
Because there are different sources of data, different methods are employed to estimate value added at constant prices by industry in China.
4.2.1 Agriculture
There is a particular method for measuring value added of agriculture at constant prices, making integrated use of extrapolation and deflation. That is to say, extrapolation is used for output at constant prices, and deflation for intermediate input at constant prices. The difference between output at constant prices obtained by using extrapolation and intermediate input at constant prices achieved by using deflation is value added at constant prices. The peculiarity of measurement methods of value added in agriculture at constant prices in China is attributable to the state of statistical compilation in the country, especially with regards to agriculture.
According to current agricultural statistics for China, the total value of agricultural output is calculated through the following procedure: first, the state sets unified base year constant prices for a variety of farm products and sends out a price list to all the related units at the basic level. Then, referring to the list and the information of the quantities of farm products produced by them, the units directly calculate the value of their agricultural output at constant prices. Finally, the administrative agricultural departments aggregate the value at constant prices of agricultural output of the units under their jurisdiction until the total value of agricultural output at constant prices for the whole country is obtained. The value at constant prices value calculated in such a way is inconsistent with the value required by the national accounts because the state-determined unified constant prices for a variety of farm products in the base year is different from the actual current market prices in the same year to some extent. As a substitute for the total value of agricultural output at constant prices of the base year, the total value of agricultural output at current prices of the base year is therefore used as the total value of agricultural output at constant prices of the base year, i.e., output at constant prices for the following years in the same base year is derived through the yearly extrapolation from the growth rate of the total value of agriculture at constant prices in China's agriculture statistics.
Intermediate input of agriculture at constant prices is obtained by summing up material consumption, material service consumption and non-material service consumption, and deflating the total by the relevant price indices in price statistics. This intermediate consumption of agriculture and price indices employed are as follows:
Material product and services components of intermediate Gorresponding price indices employed consumption of agriculture
Total 1. Intermediate material consumption (1)Seeds Grain sub-index of retail price indices of commodities in rural areas (2)Forage grass Forage grass sub-index of agricultural producer materials price indices (3)Fertilizer Chemical fertilizer sub-index of agricultural producer materials price indices (4)Fuels Fuels sub-index of retail price indices of commodities in rural areas (5)Pesticide Medicine sub-index of agricultural producer materials price indices (6)Medicine for livestock Medicine sub-index of retail price indices of commodities in rural areas (7)Farm plastic film Farm plastic film sub-index of agricultural producer materials price indices (8)Electricity The ratio of output value at current prices of industry to outoput value at constant prices (9)Purchase of small farms Small farm tools sub-index of agricultural produce tools materials price indices (10)Raw material Raw material sub-index of industrial products producer price indices (11)Office goods Furniture sub-index of residents consumer price indices in the rural area (12)Expenses on material Services sub-index of consumer price indices in services rural areas (13)Other material Other item sub-index of agricultural producer consumption materials price indices 2. Expenses on non-material Services sub-index of consumer price indices in services rural areas
Value added of agriculture at constant prices can also be obtained by using double deflation, i.e., output at constant prices is obtained by deflating output at current prices with farm products purchasing price indices, while intermediate input of agriculture at constant prices is obtained using the method described above. Value added at constant prices for agriculture is defined as the difference between the two methods. The first way is still employed to maintain continuity of measuring methods and comparability of estimates.
4.2.2 Industry
Value added of industry at constant prices is obtained by using single deflation, i.e., value added at constant prices is obtained by deflating value added at current prices with the output price index. The measurement of the output price index is conducted on the basis of measurements of output of industry at constant prices.
The method for measuring the total value of industrial output at constant prices in industrial statistics of China is basically identical with that for compiling agricultural statistics. The total value of industrial output at constant prices in current industrial statistics is not taken directly as output at constant prices in the context of national accounts for the same reason that measurement of agricultural output at constant prices is not taken directly as output at constant prices. The total value of industrial output at current prices is employed as output at constant prices of the base year, output at constant prices in the other years in the same base period is obtained through the yearly deflation with the growth rate of the total value of industrial output in industrial statistics. The price indices of industrial output are derived from industrial output at current prices divided by industrial output at constant prices.
In recent years, the inconsistency between the price change of output and that of the intermediate input into the industrial sector in China has become more and more significant, revealing an obvious deficiency in the method of single deflation based on the output price index. So the SBC sometimes corrects value added at constant prices that is obtained by single deflation with the estimates based on the extrapolation in which the output growth index is used. If productive technique and management have not shown distinct change, even though the intermediate input value in a unit of output value may have changed significantly, the intermediate input volume in a unit of output volume will not change to the some extent. There is significant inconsistency between the price change of output and that of the intermediate input. It is better to extrapolate value added at constant prices of the previous year by using the growth index of output at constant prices to obtain value added at constant prices in the accounting period than to employ single deflation based on output price indices.
4.2.3 Construction
The value added of the construction sector at constant prices is obtained through deflation, i.e., deflating value added of construction at current prices with the price index. The price index employed is determined by the price index of labor costs and the price indices of other costs in construction and installation, and the ratio of employee compensation to the value added of construction and the ratio of value added included by the other costs to the value added of construction.
4.2.4 Transportation, post and telecommunication services
The value added of transportation, post and telecommunication services at constant prices is obtained by volume extrapolation. Although relevant departments, such as the Transportation Ministry, the Post and Telecommunications Ministry, and the Bureau of Prices have set fixed prices for different periods, in practice enterprises carry out transactions at floating prices because of market conditions and other factors. The private economy has developed very quickly in recent years, and prices related to its transactions are substantially effected by market factors. Since corresponding price indices have not yet been compiled in China, in the present estimates volume extrapolation is employed to estimate value added of transportation, post and telecommunication services at constant prices.
In estimating the value added of transportation, post and telecommunication services at constant prices, the growth rates of adjusted turnover volume of passenger and freight traffic are used for transportation while the growth rates of revenues are used for post and telecommunication services. The adjusted turnover volume of passenger and freight traffic is the sum of the turnover volume of the freight traffic converted from turnover volume of passengers in a certain proportion and the turnover volume of the actual freight traffic. Turnover volume of freight traffic means the weight of delivered goods multiplied by transportation distance. Turnover volume of passenger traffic is the product of the number of passengers multiplied by distance traveled. Revenues from post and telecommunication services are the sum of a variety of services multiplied by corresponding constant unit prices. The quantity of services indicated by time point is calculated according to sequence time averages. Constant unit price is defined as the average price of a variety of post and telecommunication services. Since 1949, the Post and Telecommunication Ministry has established national constant unit prices five times, in 1952, 1957, 1970, 1980 and 1990. We use the constant unit price established in 1990.
The details about estimates of value added of transportation, post and telecommunication services at constant prices are as follows:
Value added at constant prices in the base year (for example 1990) is value added at current prices of the same year.
Value added at constant prices in the non-base year is estimated by six subsectors, i.e., railways, highways, waterways, airways, pipelines and post and telecommunications, according to type of transportation.
Value added of railways at constant prices in the accounting period is equal to value added at constant prices of the previous year multiplied by the growth rate of converted turnover volume of the railways' passenger and freight traffic. The converted turnover volume of passenger and freight traffic is equal to the turnover volume of passenger traffic divided by a conversion coefficient, plus the turnover volume of freight traffic. The conversion coefficient is determined through experience in comparing revenues and expenditures per person-kilometer (moving one person one kilometer) with those of moving one ton of goods one kilometer. The coefficient is one person per ton, which means that transporting one ton of goods one kilometer is equivalent to transporting one passenger one kilometer.
The methods for measuring value added of highways, waterways and airways at constant prices in the accounting period are basically identical with those used for railways. They are respectively derived from value added at constant prices of the previous year multiplied by the growth rate of the converted turnover volume of passenger and freight traffic. The conversion coefficients are ten persons per ton for highways, three persons per ton for navigable inland waterways and one person per ton for navigable ocean waterways. When the data on the turnover volumes of navigable inland and navigable ocean waterway are not available, the conversion coefficient for waterways and airways are taken as two persons per ton and 13.7 persons per ton, respectively.
The value added of pipelines at constant prices in the accounting period is equal to value added at constant prices of the previous year multiplied by the growth rate of the turnover volume of pipelines.
Value added of post and telecommunication services at constant prices in the accounting period is equal to value added at constant prices multiplied by the growth rate of revenues from communication services. Care must be taken so that revenues from other, especially new, businesses such as rental and repair operations are not added to the actual business revenues of the posts and telecommunications services. If they are added in, the growth rate of the post and telecommunications services will be exaggerated.
Totaling the value added at constant price of the six subsectors above provides value added at constant price in the accounting period for the transportation, post and telecommunication services.
4.2.5 Commerce, financial intermediaries and insurance
Value added of commerce at constant prices in the accounting period is obtained through single deflation, employing retail price indices of commodities. Value added of financial intermediaries and insurance at constant prices is also obtained through single deflation. The price indices are the average of retail price indices of commodities and price indices of investment in fixed assets, weighted by the ratios of household consumption and fixed assets formation in GDE.
4.2.6 Other services
Other services include real estate, social services, health care, sports and social welfare, education, culture and arts, radio, film and television, scientific research and technical services, services for farming, forestry, animal, husbandry and fishery, geological prospecting and water conservation, government agencies, party agencies and social organizations, etc. The methods for measuring value added of these services industries at constant prices are basically identical, i.e., the estimates of value added at constant prices are divided into two parts: estimates of depreciation of fixed assets and net value added at constant prices. Depreciation of fixed assets at constant price is obtained by summing up depreciation of fixed assets at constant prices of the previous year (after appropriate adjustment) and depreciation of newly increased fixed assets at constant prices in the current year. Depreciation of newly increased fixed assets at constant prices is obtained by deflating depreciation of newly increased fixed assets in the current year with price indices of investment in fixed assets. Net value added at constant prices is obtained through the single deflation. The price indices employed are the relevant services sub-indices of residential consumer price indices, the details of which are shown as follows:
Sector Deflator employed
Real estate Housing sub-index of consumerprice indices Social services Services sub-index of consumer price indices(bus fares,washing and hair cut fares,expenses for repairs and other services) Health, sports and social Services sub-index of consumer price indices welfare (recreation and education costs) Other services Services sub-index of consumer price indices
The ideal method for measuring value added at constant prices is double deflation or double extrapolation, i.e., output and intermediate input at current prices are respectively deflated by the output price index and intermediate input price index, or output and intermediate input at constant prices in the previous year are respectively extrapolated using output volume indices and intermediate input volume indices. Because it is not always possible to maintain consistency between price changes of output and intermediate input or to keep appropriate proportions between price changes of output and intermediate input. There is a problem with single deflation. For example, when value added at current prices is deflated by using output price indices, if the growth of intermediate input prices is faster than that of output prices, we could underestimate value added at constant prices; if the growth of intermediate input prices is slower than that of output prices, we could overestimate value added at constant prices. There is a similar problem in using single extrapolation.
But double deflation or double extrapolation require much more data on price and quantity than single deflation and single extrapolation. Double deflation or double extrapolation have not been employed for all the sectors in most countries, including many developed countries.
Furthermore, double deflation, or double extrapolation, is not always the best method. The usefulness of double deflation depends on the full coverage and reliability of data needed in compiling price indices and rationality of weights. If the data do not meet these criteria, double deflation can result in even greater discrepancies. Mr. T.P. Hill, an expert in national accounts pointed out in his book The Measurement of Real Product that value added at constant prices directly obtained through deflating value added at current prices with output deflators or input deflators is a deviant estimate of actual value added at constant prices, because the approach does not take account of the difference between price changes of output and intermediate input. Value added at constant prices derived from double deflation is a normal estimate of actual value added at constant prices, but it is more easily affected by statistical discrepancy than value added at constant prices obtained through single deflation. As a result, in some cases, the discrepancy of double deflation is higher than that of single deflation, which means that the result of single deflation is better than that of double deflation.
Price indices of China and related accounting information are still of low quality, so there are many kinds of deficiencies in estimates of value added at constant prices by industry. At present, the State Statistical Bureau is improving its statistical methodology, so there will be continuous improvement in the estimates of value added at constant prices in China.